Catalina Espinosa
Research expert covering society, economy, and politics for Europe and the EU
Inflation in Europe - Statistics & Facts
Economies across Europe experienced a severe inflationary episode during 2022 and 2023, precipitated by the economic disruption caused by the COVID-19 pandemic, as well as the trade sanctions placed on Russia in response to its war of aggression against Ukraine. The pandemic did not initially cause a spike in inflation when it broke out in 2020, as economies across Europe went into recession and consumer demand was suppressed due to economic uncertainty and insecurity. As lockdown restrictions began to be eased in 2021 and 2022, however, this pent-up demand was released, while the supply of goods and services struggled to keep up due to both supply chain disruptions and labor shortages, leading to a sustained increase in prices across a wide range of sectors.
Following Russia's invasion of Ukraine in February of 2022, energy prices shot up, as most European countries chose to boycott Russian oil and gas – previously their largest supplier of natural resources. Inflation reached its peak in October 2022, when the overall inflation rate for the EU was 11.5 percent and 11.1 percent for the UK, since which the European economy has experienced a prolonged period of disinflation. While inflation now stands at 3.4 percent in the EU and 4 percent in the United Kingdom, central bankers are wary to roll back the high interest rates which they set in place to quell inflation during 2023. According to the most recent forecasts, inflation will average between 2.4 percent and 3.3 percent in the Eurozone during 2024, while the ECB will lower its key interest rate from 4.5 percent to 4.15 percent during the year.
Once an inflationary episode begins, price rises may be self-reinforcing, as workers demand higher wages in order to be able to afford goods and services, adding further cost pressures for businesses, which are then passed back to the consumer in the form of even higher prices. While nominal wage growth did accelerate in 2023, this only began to match the high rate of inflation in the latter half of 2023, while real wage growth – that is, wage growth adjusted for inflation - was sharply negative in 2022. At the same time, some large companies have made so-called 'windfall profits' - sudden increases in profits due to surging prices – during this period, leading commentators to claim this as evidence of inflation being driven by corporate greed, however, this theory is highly contested among economists.
This is particularly a problem for the ECB, as it must set monetary policy for the 20 Eurozone member countries, whose rates of inflation vary between the 6.6 percent recorded in Slovakia during December and the 0.5 percent recorded in Belgium in the same month. Added to this is the fact that disinflation is occurring differently across the various sectors of the European economy – energy costs, which were the main driver of high inflation during 2022, have now sunk into deflation, while food, drinks, and restaurants and hotels all remain at around six percent or above. Central bankers will keenly watch developments in these categories during the year, as there may be evidence that while price rises in sectors such as energy or transport were transitory and have now passed, price rises in other sectors may now be driven by a persistent increase in labor costs, which may prove harder to dampen than previous inflation. While the ECB’s main interest rate is forecast to decrease by 0.35 percent during 2024, this will depend on whether disinflation continues across the European economy.
Following Russia's invasion of Ukraine in February of 2022, energy prices shot up, as most European countries chose to boycott Russian oil and gas – previously their largest supplier of natural resources. Inflation reached its peak in October 2022, when the overall inflation rate for the EU was 11.5 percent and 11.1 percent for the UK, since which the European economy has experienced a prolonged period of disinflation. While inflation now stands at 3.4 percent in the EU and 4 percent in the United Kingdom, central bankers are wary to roll back the high interest rates which they set in place to quell inflation during 2023. According to the most recent forecasts, inflation will average between 2.4 percent and 3.3 percent in the Eurozone during 2024, while the ECB will lower its key interest rate from 4.5 percent to 4.15 percent during the year.
What caused the recent inflationary episode?
The cause of inflation is multi-faceted and much debated by economists, however, we can point to several factors which are likely to have contributed the most to the recent bout of inflation in Europe. These factors may include the supply chain issues which were caused by the pandemic, pent-up consumer demand which was released following the easing of restrictions, high energy prices, expansionary monetary and fiscal policies, labor market shortages, and price gouging in highly concentrated sectors. With these factors compounding each other, prices began to rise across the entire economy beginning in late 2021.Once an inflationary episode begins, price rises may be self-reinforcing, as workers demand higher wages in order to be able to afford goods and services, adding further cost pressures for businesses, which are then passed back to the consumer in the form of even higher prices. While nominal wage growth did accelerate in 2023, this only began to match the high rate of inflation in the latter half of 2023, while real wage growth – that is, wage growth adjusted for inflation - was sharply negative in 2022. At the same time, some large companies have made so-called 'windfall profits' - sudden increases in profits due to surging prices – during this period, leading commentators to claim this as evidence of inflation being driven by corporate greed, however, this theory is highly contested among economists.
Disinflation and central bankers' interest rate dilemma
Since November 2022, Europe has been experiencing disinflation – that is, reductions in the rate of price increases. This is generally a positive sign for the European economy, however, central banks now face a policy dilemma. While their efforts to stem inflation by hiking interest rates in 2023 seem to have been successful, they now must decide whether to maintain this high rate of interest – thereby increasing the cost of credit and dampening demand in the European economy – or to reverse this policy and begin to lower interest rates. Most central banks in Europe are bound to a mandate of trying to achieve a two percent annual inflation rate, and while the rate of inflation in the EU and Eurozone appears to be heading towards this target, there are now fears that due to the delayed transmission of higher interest rates several European countries could underperform their growth expectations, or even slip into recession and deflation.This is particularly a problem for the ECB, as it must set monetary policy for the 20 Eurozone member countries, whose rates of inflation vary between the 6.6 percent recorded in Slovakia during December and the 0.5 percent recorded in Belgium in the same month. Added to this is the fact that disinflation is occurring differently across the various sectors of the European economy – energy costs, which were the main driver of high inflation during 2022, have now sunk into deflation, while food, drinks, and restaurants and hotels all remain at around six percent or above. Central bankers will keenly watch developments in these categories during the year, as there may be evidence that while price rises in sectors such as energy or transport were transitory and have now passed, price rises in other sectors may now be driven by a persistent increase in labor costs, which may prove harder to dampen than previous inflation. While the ECB’s main interest rate is forecast to decrease by 0.35 percent during 2024, this will depend on whether disinflation continues across the European economy.
