In their preliminary estimate on inflation for the month of June, Eurostat on July 2nd reported that they expect year-to-year price increases in the currency area to be 2.5%. This, they note, is a tick down from 2.6% in May.
The numbers published in the report show that some euro zone countries continue to operate with inflation above 3%: Spain (3.5%), Croatia and the Netherlands (3.4%), Austria (3.2%), and Cyprus and Portugal (3.1%). Some commentators have taken this as a reason to criticize the European Central Bank for “easing” its monetary policy:
The problem with this argument is that it carefully ignores the countries that are at the other end of the scale, with inflation rates at 1.5% or less: Ireland (1.5%), Latvia (1.4%), Lithuania (1.0%), Italy (0.9%), and Finland (0.6%). These inflation numbers are well below the long-term 2% target that the ECB is operating with.
If we let Daniel Lacalle’s logic run its full course, the ECB should tighten its monetary policy until the 3% inflation group had been brought down to the 2% target—while apparently ignoring the ramifications for the sub-1.5% group of economies. This would, of course, bring those countries into a recession; given that some economies in Europe are already weak, the outcome could be worse than a recession.
Contrary to Lacalle’s belief, the inflation visible in the 3%-inflation countries is not a monetary phenomenon. If it were, the recent ECB rate cut would have caused a visible uptick in inflation across the currency area.
This is not the case. In fact, there is no consistent trend in inflation in the euro zone. Overall, inflation in the euro zone has stabilized, much like it has done in the U.S. economy. In almost every subcategory that Eurostat looks at, including energy, services, and food and alcohol, the trend in inflation is for the most part flat, or close to flat.
A similar stabilization is visible at the national level. Germany, the largest economy in the euro zone with a preliminary inflation rate of 2.5% for June, has had inflation rates in the 2.3-2.7% range since February. French inflation has also stabilized, with a 2.4% average since March, while the Spaniards have had an average of 3.4% inflation in tight stability since the beginning of the year.
There are also states where inflation is still in decline. Slovenia had an inflation rate of 3.4% for the first three months of 2024, after which inflation fell all the way to 1.6%. Croatia has had a similar experience, reducing inflation from 4.9% in March to 3.4% in June. Austria went from 4.3% in January to 3.2% in June, while the Irish economy experienced a drop from 2.7% in January to 1.5% in June.
Other euro zone members have to put up with the opposite trend:
- Belgian inflation has accelerated this year, from 1.5% in January to 5.5% in June;
- Portugal was at 2.5% in January and is now at 3.1%;
- The Netherlands had contained its inflation rate at 2.6% in April but registered 3.4% in June.
With this sprawling pattern of inflation—or, to be more precise, the absence of a pattern—the default conclusion is that inflation in individual countries has various, different causes. However, if we take a step back and review where Europe is today, a different explanation of euro zone inflation emerges. Given the recent episode of artificial, government-imposed economic shutdowns, followed by an episode of distinct monetary inflation, I would suggest another explanation for why we have a group of euro states with 3% inflation and one where it barely reaches 1-1.5%.
The economic shutdown, which followed different patterns in different countries, generally speaking, took a toll on smaller, more vulnerable businesses than it did on larger corporations. By weeding out smaller competitors to dominant businesses in this way, the artificial economic shutdown reduced the degree of competition and therefore increased the market-share-based price margins for prevailing businesses.
I know of no research to date that has sought to determine to what degree this explanation of inflation is correct. I present it based solely on economic theory and what economists refer to as ‘stylized facts’—others would call it anecdotal evidence. Nevertheless, it is necessary for us economists to investigate the effects of the COVID-related economic shutdowns on the degree of competition in, e.g., retail, but also the manufacturing of products where small scale is not necessarily a disadvantage: food, personal hygiene articles, clothes, etc.
We can, in all likelihood, find a similar reduction in the degree of competition within service industries, especially those that are directed toward small businesses and households.
If this explanation is correct, it should correlate high degrees of deteriorating competition with higher inflation, and vice versa. However—again—until we get the evidence to verify my hypothesis, we can safely conclude that the ECB’s recent rate cut has had no influence on the inflation rates in June. It will not affect inflation in July either: to be of any material difference at a level that overshadows other causes of inflation, the rate cut would have had to be significantly larger than it was.
