Expensive energy is the most important reason for high inflation rates in all European countries. This cannot only be learned from the analyses of the Autumn 2022 Economic Forecast for individual Member States;  ECB President Christine Lagarde too named – within the scope of the monetary dialogue in the ECON Committee on 28 November 2022 – the high prices for gas, oil and electricity as the main factor for the massive rise in inflation. Against this background, the energy mix and the different dependency levels regarding energy imports of European countries are the key reasons for the different inflation rates. Countries, which are more dependent on imports, are significantly more affected by increased energy prices than those countries that are more energy autonomous.

Besides energy, food prices are a major cost driver. Due to the war in Ukraine, which, due to the high level of grain exports, is known as the “Granary of Europe”, prices, especially in the food sector, are reaching record levels. This, in particular, very much affects those countries, which import comparably high levels of food. This impacts in particular Estonia, which in October 2022 had the highest inflation rate in Europe. However, rising food prices are also caused by climate impacts: hence, the dry conditions this summer are a major country-specific reason for the sharply risen food prices in Portugal.

Finally, the different currencies in Europe also play a not to be underestimated role regarding different inflation rates. For EU Member States having their own currency, the exchange rate to the euro is an additional factor, which can strongly influence the price level due to imports and exports. Hence, the significant drop of the Hungarian Forint in 2022 compared to the euro is a major reason why the inflation rate of 21.9 % in Hungary is right at the top of the table. The opposite applies to Switzerland with her strengthening Swiss Franc. There, the inflation rate in October was only 3 %.

Country comparison strengthens AK demand for a price cap

According to data, those countries, which have intervened in the energy market and introduced a price cap for electricity, gas and/or district heating, show comparably lower inflation rates. This for example is the case in France, where according to estimates by the Commission, the inflation rate – due to the price cap for electricity and gas – fell by 3 % points. In Spain, which, with an inflation rate of 7.3 %, shows the second lowest rate in Europe after France, the government, based on the “Iberian model” has also introduced a price cap for gas, which is used for generating electricity. Here too, the EU Commission names this measure as the major reason for the lower inflation rate.

Following this, AK demands an “Iberian model” for the entire EU, hence capping the price for gas, which is used for generating electricity, thereby having a determining influence on the electricity price. A Study commissioned by AK has shown that this cap would reduce the inflation rate in Austria by a quarter, thereby being able to decrease the drop in real wages by a third. The often mentioned concerns that a price cap would result in increased gas consumption, has been contradicted by another study commissioned by AK. Increased gas consumption for generating electricity in Spain and Portugal is mainly the result of the decline in electricity production by hydropower due to the dry summer 2022 as well as increased exports to France and Morocco.

Further information:

AK EUROPA: Autumn 2022 Economic Forecast

AK EUROPA: Empirical Analysis of the Iberian Electricity Price Cap (Part I/II)

A&W Blog: How is the inflation rate measured? (German Only)

A&W Blog: Breaking the profit-price spiral – Plea for an effective anti-inflation commission (German Only)