Why Is Inflation so High in Europe? Here’s What You Need to Know

Time and time again, it’s a story about inflation…

We published a SPOTLIGHT in June, explaining inflation in key European countries and what local authorities were doing to bring it down.

Many things have happened since then: The war in Ukraine has escalated, Europe has plunged into the energy crisis, markets have seen even more volatility…

With the year almost over, it’s time to give you an update on this inflation thingy.

To see where the situation is headed now, we decided to freshen up our previous SPOTLIGHT by adding some new economic and political data.

So let’s dive right in and take a look at inflation in several countries, including France, Germany, Italy, the UK, and Switzerland.

(But spoiler alert: things are not looking great.)

Is inflation rising in France?

Inflation in France seems to have slowed down, but maybe don’t get too excited about it.

French consumer prices advanced 6.2% from a year ago in September, down from 6.6% in August. This drop was largely due to various public policies, like the gas “tariff shield” that was implemented by the government to freeze gas prices amid rising living costs.

But analysts say this slowdown in inflation doesn’t necessarily mean a drop in underlying inflationary pressures. They expect the cost of food to increase by some 12% by the end of the year.

Moreover, the general economic outlook is not much better: while economic growth should reach 2.7% in 2022, it is expected to fall to 1% in 2023.

So what is the government doing to make things better, you may ask?

President Emmanuel Macron committed about 25 billion euros to mitigate the effects of inflation and was planning to introduce new measures to boost purchasing power, ranging from an increase in base pensions and civil servants' salaries to food subsidies for the poor.

“We are totally determined to fight against inflation and protect the poorest households against the rise in gas and electricity prices,” Finance Minister Bruno Le Maire said.

But analysts say the measures may not be enough to prevent price fears from impacting consumer sentiment, which has already fallen below levels seen during the pandemic and the Yellow Vest protests.

Take a look at the graph comparing consumer confidence rates in France to those in other OECD countries between September 2021 and September 2022:

You can see that France’s consumer confidence fell sharply around March and continued to decline in the following months.

In September, it dropped to its lowest level since June 2013, as worries about inflation weighed on sentiment in Europe’s second-largest economy.

What is Germany’s current inflation rate?

Germany’s inflation reached 10% in September, its highest level on record!

With its reliance on energy imports from Russia, the rise in energy prices and the ban on Russian energy imports have strongly impacted the German economy.

To combat consumer price increases, Germany, too, is planning a series of measures to try and ease the burden on consumers, especially when it comes to rising energy prices.

These measures include cheaper public transportation tickets during the summer months, discounts for gas station drivers, and paying German consumers’ heating bills for December 2022.

And yet, as Holger Schmieding, the chief economist of Berenberg Bank, said, “the gas pump discount and other interventions may well lead to the inflation rate in Germany increasing further in the coming months.”

And the recent suspected sabotage of the strategic Nord Stream gas pipelines probably won’t make things easier.

The two pipelines linking Russia and Germany are now at the center of international intrigue after a series of explosions caused what might be the single largest release of methane in history, shutting down any possibility of using it to import Russian gas to Europe for the foreseeable future.

Is Italy experiencing high inflation, too?

Yep.

Italy is facing its highest inflation rate in nearly 37 years.

In September, the Italian headline inflation rate accelerated to 8.9%, up from 8.4% in August.

“Inflation hurts the lowest and poorest income segments. The government has spent about €30 billion to mitigate the effect of energy prices on the most vulnerable families, and there have also been interventions on firms,” Draghi said.

When Draghi took office in February 2021, Italian inflation was running at about 1%. When he resigned in July 2022, inflation topped 8%, posing a difficult challenge for his successor Giorgia Meloni.

Like Germany, Italy relies heavily on Russia for its energy, leaving it particularly vulnerable to the war in Ukraine:

“Some countries are more exposed than others. Within the major countries, Italy is as exposed as Germany, and probably even more, to high energy costs …  It is a massive term of trade shock to consumers, which means the whole country becomes poorer,” said Lorenzo Codogno, former director-general of the Italian treasury.

And a recent agreement between Italy and Algeria to supply gas from North Africa will take years to pay off.

Will the cost of living go down in the UK?

According to the Bank of England, things will get worse before they get better. U.K.’s consumer price index hit 10.01% in September, well ahead of the BoE’s 2% target, stoking further fears around the cost of living that has put many lives on hold.

In an effort to tame rising prices, U.K.’s central bank has raised interest rates seven times since December 2021. Looks like it’s not enough…

Nearly a quarter of adults said paying their regular household bills in March was “very difficult” or “difficult”, compared to a year ago, according to the latest Office for National Statistics (ONS) report.

Moreover, a recent YouGov study showed that out of 2,000 Brits polled, 42% will struggle to pay their bills, and almost 50% said they knew someone who was struggling.

To address the crisis, the government has introduced several measures, including a scheme to boost the incomes of low-income households through one-time increases in welfare payments. But charities and anti-poverty organizations have slammed the measures as only providing “temporary relief.”

Last month, Liz Truss took office, promising to revive the U.K. economy. Instead, her tenure so far has been marred by turmoil as the pound fell to record lows, mortgage rates soared, and chaos in bond markets threatened the country’s financial stability.

As if that were not enough, analysts forecast more pain for Britain: according to the IMF, high inflation will last longer in the U.K. than in similar economies. It will be the highest in the G7 at the end of 2023, while in the Eurozone, only Slovakia is forecasted to have a higher rate.

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