The great economic problem of the West is called inflation, and its evolution continues to be the main headache for legislators and monetary policy bosses. The European Central Bank has the mandate to return it to 2%, but its analysts also address other aspects of the phenomenon: this Tuesday the entity has published a comparative study on the evolution of price increases in Europe and the United States.
His diagnosis indicates that while in the Old Continent the increase in energy and food prices have been key to boosting the cost of living, in the US it has been the boom in the consumption of goods fostered by checks and government stimuli, as well as the greatest aid to the unemployed.
Another conclusion is that headline inflation will be higher in the single currency countries, at 6.3% in 2023 and 3.4% in 2024. The same will not happen with core inflation, which excludes energy and food, the most volatile: in the euro countries it will be 4.2% in 2023 and 2.8% in 2024, rates that they estimate will be “somewhat below” those of the US.
Frankfurt predicts that headline inflation will remain higher in the euro zone “as a result of higher price exposure to shocks related to the war in Ukraine.” And he explains with data the enormous differences in the origin of the inflation of both blocks. “In November alone, energy inflation accounted for 38% of headline inflation in the euro area, but only 14% in the United States. Together, energy and food inflation account for about two-thirds of headline inflation in the euro area, but only about a third of headline inflation in the United States,” he notes.
This energy shortage translated into an estimated impact for Europe, only in the first three quarters of 2022 and the last of 2021, “equivalent to a cumulative transfer of around 2.2% of GDP to the rest of the world”, according to estimates from the organism.
The United States has lowered its headline inflation to 7.1% in December, and the euro zone ended the year with a 9.2% rise in prices. The numbers give the Americans an advantage in the fight against price escalation. The European Central Bank maintains that the country led by Joe Biden has benefited from other factors, such as the strength of the dollar —which penalized Europe—, and above all from energy self-sufficiency thanks to its gas and oil reserves. On the contrary, in Europe, the dependence on Russian gas and, in general, on foreign energy, devoured part of the savings accumulated during the pandemic, damaging consumption, or in the words of the ECB, “significantly reduced the disposable income of households , with a particularly strong impact on the demand for durable goods”.
The bank points out that the US GDP returned to its pre-pandemic level about two quarters before the GDP of the euro zone, thanks to a greater recovery in private consumption and investment. “In the euro area, private consumption of both goods and services has very recently returned to the level registered in the fourth quarter of 2019, while in the United States it had already exceeded its pre-pandemic level at the beginning of 2021,” compares.
Regarding future growth prospects, the ECB experts recall that the US economy will perform better: while GDP in the euro area will fall slightly in the fourth quarter of 2022 and the first quarter of 2023, the US is expected to remain positively, although with modest advances. This will imply, according to the authors of the text, that the boost of economic activity to inflation will be less in the euro zone.
