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Inflation Starting to Show Up in Eastern Europe

20 August 2020 By Mircea Vasiu

European inflation is starting to rise. In July, the euro area annual inflation rate was 0.4%, up from 0.3% in June. While still far from the ECB 2% target, and just shy above the all-important deflationary level (i.e., zero level), it offers an encouraging sign that the central bank’s actions do work to some extent even in a global economic recession.

It may sound strange for monetary policymakers to target inflation – and to specifically push it to higher levels. However, the consensus among economists exists that inflation far away from the zero level, but not so high to affect the value of money, is good for stable economic growth. That level is the 2% level – and it matters the most when trading the currency market.

Uneven Inflation Throughout the Euro Area

Unlike other central banks in the world, the ECB has the difficult task of setting monetary policy over different economies. Different conditions exist in each country, yet the ECB must find one solution to fit them all.

Only in July, for example, Greece faced deep deflation while Austria’s inflation is close to the ECB 2% target. It shows, once again, the discrepancies between the economic conditions in the euro area countries.

The chart above shows something else too. It shows the data for all European Union countries, not only for the ones in the euro area. A close look at the countries on the right side of the picture, and you will notice names like Hungary, Poland, or the Czech Republic. They are not part of the euro area – but have now what economists refer to as rampant inflation.

It is one thing to fight for inflation to reach below, but close to 2% and another thing to watch it soaring to 4% levels. And threatening to move even higher.

The pandemic showed, once again, what the governments and central banks are capable of. Fiscal and monetary stimulus is needed, but it should not come at the expense of diluting people’s savings.

We can see, once again, the difference between developed and emerging markets. On the one hand, stable monetary conditions warrant price stability, and inflation remains well below target. On the other hand, rampant prices end up debasing the currency too fast for most of the households to react. No wonder gold is back in fashion.