On October 17th, Eurostat reported:
The euro area annual inflation rate was 1.7% in September 2024, down from 2.2% in August. A year earlier, the rate was 4.3%. European Union annual inflation was 2.1%
which was a drop from 4.9% in September 2023. This decline in inflation is well within the realm of the expectable given primarily the ECB’s tighter monetary policy over the past two years.
Looking at individual countries, the story of inflation continues to vary significantly. On the impressive side, Hungary has reduced its rate from 12.2% a year ago to 3.0% now (much in line with my predictions last fall). After having dealt with 3.5-4% inflation in the spring and early summer, so far in the third quarter Hungary has seen receding inflation and stability in economic activity (unemployment remains steady at 4.3%).
Slovenia has also made respectable gains in fighting inflation. From a 7.1% rate in September last year, they have brought it down to 0.7% this year. Slovakia is not far behind, reining last year’s 9.0% to a current 2.9%. Italy reached 0.7% in September this year after having suffered from 5.6% a year earlier.
The two largest economies in the euro zone, France and Germany, have also made great strides in combating inflation:
- In Germany, from 4.3% last year to 1.8% this year;
- In France, from 5.7% last year to 1.4% this year.
Some countries still have a long way to go. The Polish inflation rate in September 2023 was 7.7%; by September this year, it had not even fallen by half, lingering instead at 4.2%. Likewise, Romania has come down from 9.2% to 4.8%, with a long way to go to reach price stability.
At the same time, there are countries where inflation is actually rising. In Belgium, year-to-year price increases were at 0.7% in September last year; the same month this year, the inflation rate was 4.3%. An equally odd trend is at work in Holland. In September last year, prices were declining at a rate of -0.3% per year; now the Dutch inflation rate is at 3.3%.
It is difficult to pinpoint an immediate macroeconomic reason for the return to inflation in Belgium—especially at a level that is no longer low, but moderate (at 4% or more). Without a careful examination of Belgian public finance—the relevant data lags behind inflation data—it is nevertheless conceivable that the Belgians may artificially have increased the cost of living and doing business in the country.
In short, raised taxes.
We can get a better idea of what is happening in Belgium toward the end of the year when third-quarter public finance data is available. Until then, let us note that the Belgians are not suffering from economic overheating: the official unemployment rate has hovered a tick above 5.5% for the better part of 2024. This reinforces the impression of an economy with a stagflation problem.
Another noteworthy element of the Eurostat inflation report is the relatively large difference between the euro zone and the EU as a whole. While the former averaged 1.7%, the EU in total stood at 2.1%. This is statistically curious, given that two-thirds of all EU member states are also members of the euro zone and that the four largest EU economies—Germany, France, Italy, and Spain—are all within the currency area.
If anything, differences between the two inflation rates should be smaller and should shrink over time.
The immediate question arising from this conundrum is to what extent EU member states top the inflation league in Europe as a whole. There is some truth to this: two of the three economies with an inflation rate above 4% are non-euro-zone, namely Romania (4.8%) and Poland (4.2%). The third country in that group is, again, Belgium (4.3%), which is part of the euro zone.
In the 3-4% interval, we find the Netherlands (3.3%), Estonia (3.2%), Croatia and Greece (3.1%), and Hungary (3.0%). Only Hungary has its own currency, which means that so far, we have only found three non-euro countries at the higher end of the inflation spectrum.
By contrast, the countries with 1% or less inflation are Ireland (0.0%), Lithuania (0.4%) Italy and Slovenia (0.7%), Luxembourg (0.8%), and Finland (1.0%). In other words, only members of the euro zone.
Given that the inflation episode that ended last year was of the monetary kind, the explanation for the unusually large difference in inflation between the euro zone and the non-euro EU countries is likely traceable back to when, and by how much, non-euro central banks tightened their monetary policies. If the euro zone was leading here—and I strongly suspect that it was—then it is only natural that the non-euro countries are still dealing with a lingering, but modest monetarily driven inflation.
