Estonia, Lithuania, Hungary and Poland are European inflation champions – what the energy crisis has to do with it

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From: Alexandra Fedorska

An employee works at a butcher’s shop in Budapest, Hungary, on January 14, 2022. In Hungary, the annual average inflation rate was 5.1 percent in December 2021, breaking a 14-year record, the country’s Central Statistics Office (KSH) said on Friday. © Attila Volgyi / Imago

In some countries of Central and Eastern Europe, inflation is already in the double digits. The biggest price driver in the region are energy costs.

  • Energy prices and wage increases are driving inflation in Estonia and Lithuania.
  • The Czech Republic was able to curb inflation for a long time, but now has to reckon with massive price increases.
  • Hungary has capped the prices of basic commodities and banned credit rate hikes.

Inflation exceeded the 5 percent mark in Germany in December 2021. This value is much higher in the states of Central Europe and especially in the Baltic States. In Estonia, the inflation rate was 12 percent in November 2021. In Lithuania, this value was 10.6 percent in December 2021. These increases are mainly due to price increases in energy costs. In Estonia, energy prices increased by 55 percent in November 2021 compared to the previous year.

In addition, there are other reasons why inflation in Central and Eastern Europe is higher than in the rest of the EU. A greatly simplified thesis could also be that the labor markets and financial markets in this region have come through the pandemic particularly well and that wage increases of up to 10 percent, as in Lithuania, are reflected in high inflation.

The starting position in 2020: Economic consequences of the corona pandemic and energy costs

In addition to energy costs, the high inflation is also caused by the economic consequences of the Corona* pandemic. Delivery bottlenecks and catch-up effects are causing prices to rise worldwide. However, some economies already had significantly higher inflation before the pandemic. The Polish Economic Institute (PIE) emphasizes that the price increase in Poland* in 2019 by 2.3 and then in 2020 by 3.4 percent was already above the desired level of the Polish National Bank. In this case, economists speak of base inflation. On average, this is higher in Central Eastern Europe than in the rest of the EU. Thus, the current inflation came at a moment when prices have already risen faster than expected.

In Estonia*, however, the situation was completely different in this respect. The price trend was even down here in 2020 at -0.6 percent. Then there was a massive jump in prices, mostly due to energy costs. In addition, the Estonians potentially have up to €1 billion in additional funds as a pension pillar will no longer be mandatory in September 2021. You can invest the money alternatively.

(Climate change has long since arrived in Central Europe. Between 2014 and 2020 it was drier than ever before in the Czech Republic. This had an impact on plans in Temelin, for example.)

In Poland, where inflation was 8.6 percent in December 2021, housing costs, food and transport costs were the price drivers in addition to energy. In the Czech Republic*, on the other hand, relative stability in price growth was still observed in November 2021. A strong increase of 6 percent did not occur until December 2021. The highest price increases were observed in the field of transport. Experts at the Czech National Bank expect prices to rise sharply in the coming months. It is not excluded that this will soon also be in double digits. In Lithuania*, a two-digit value is currently already being calculated by the statistical office. There was a dynamic of wages, which have been increasing for several years. In areas like medical care, salaries have almost doubled in the last five years.

High energy costs as a price driver: Measures against inflation

Since the euro countries Estonia and Lithuania have the highest inflation rates in the region, the experts cautiously assess the influence of the respective national banks on monetary policy. The Czech Republic reacted quickly and raised the key interest rate in faster and larger steps than, for example, Poland and Hungary. The key interest rate in the Czech Republic is 3.75 percent. Poland has now increased the key interest rate to 2.25 percent. The consequences for mortgage borrowers are already being felt. Monthly loan installments have risen significantly and new mortgage loans are stagnating.

(Hungary has been supplied with natural gas from Russia since 1995. A new contract has now been negotiated. Hungary has thus become significantly dependent on Gazprom.)

Hungary* wants to freeze the prices for six staple foods from February. Sugar, flour, oil, milk, chicken breast and pork drumstick prices are set to remain at October 2021 levels. Previously, Hungary had introduced the same measure for petrol. Home loan rates should also remain unchanged so that there are no effects comparable to those in Poland. Despite the increase in key interest rates, banks will not increase interest rates on loans. You must inevitably expect losses.

Like Poland, the Czech Republic has temporarily suspended VAT on energy sources and fuels. In Poland, a reduction in fuel tax was first introduced, then VAT was reduced from 23 to 8 percent. Further measures of this kind are already planned, as VAT on food is to be abolished in Poland. Critics fear that this will only delay inflation and that the effects will again lead to a sharp rise in inflation in 2023. (Aleksandra Fedorska) * is an offer from IPPEN.MEDIA.

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