Power, potatoes and pyjamas: how inflation influences European countries
The European Correspondent - Dec 2024
While felt everywhere, inflation influences European countries differently. We looked at three different stories from our continent – from surprisingly stable electricity prices to horrendously expensive clothes.
by Yanika Borg, Eli Volencová, Erik Szilárd Boros, Sebastian Graeff
The word 'inflation' has a somewhat unfortunate origin. In the Middle Ages, it was used to denote a 'swelling in the body' associated with flatulence. It only came to be associated with money, and later, price increase, in the 1800s.
Nowadays, inflation measures how much more expensive goods and services have become over time. High inflation, as Europe has seen in the past years, usually happens due to a combination of factors: Excessive demand, where too much money chases too few goods, and supply shocks – which happened when gas prices rose after Russia invaded Ukraine, significantly increasing production costs. This then translates onto consumers, making life more expensive – especially as wages usually don't keep up with increased prices.
This can result in low ratings for incumbent governments. For example, it influenced the European elections in June and had a massive impact on the US elections in November, with more people looking to the far-right for solutions. But inflation doesn't play out equally across Europe.
To understand how it impacts citizens differently, we did a deep dive into the data. We compared inflation data for many categories, such as energy, food, and clothing, in several European countries. We were primarily interested in the differences – and from the many interesting threads we found, we picked three. We left out countries experiencing extreme inflation, such as Türkiye, as the scales are off the charts and deserve a separate analysis.
How it works
We used the Harmonised Index of Consumer Prices (HICP) for this story. The Index is a basket of goods that allows us to track consumer prices. Each country's basket (the Index) includes basic items like milk, bread, and apples. The HICP is a standardised, harmonised version of this Index across countries, allowing us to compare them.
We then set the value of the Harmonised Index for each country in 2015 at 100%, which is a standard practice in the field. This was our base. If the HICP value in the following year was 120%, prices had increased by 20%. Thus, we can understand how values have changed over the past decade.
With the big words out of the way, what do we see?
Behold, Malta's straight line!
Following Russia's invasion of Ukraine, inflation for electricity and gas surged across most European countries. Consumers faced shocking electricity bills, with nearly all countries failing to return to pre-2022 inflation trends. In contrast, Malta uniquely stabilised its electricity prices. The Maltese government maintained 2014 rate levels, paying for any subsequent price increases.
How does this feel in Maltese lives? As Damian, a married nurse, told us, "It's difficult to know how these subsidies affect us since we have not actually lived with higher bills. It's not like we pay the full electricity price and then get a rebate later on…we never see the higher costs. However, everyone is pretty sure that come the day subsidies stop, it will have a huge impact on families and business."
Hungary's pricey paprikash
Hungary experienced extreme inflation in 2022-2023 due to a "perfect storm" of factors. The government made a lot of interventions. To mention just two examples: it placed price caps on food items, with the extra costs needing to be absorbed by businesses. Businesses then reflected these increases onto consumers. There was also a lot of election spending in the run-up to elections in 2022, where people were given rebates and spending incentives. Combined with international events like rising energy prices and Russian tensions, this led to economic instability. Inflation peaked at around 50% year-on-year, significantly impacting household energy, food prices, and small businesses.
Erik, who used to work at a grocery store close to the Slovak border, remembers that "we'd often get people coming from across the border to buy cheaper goods. During the past two years, Hungarians have started going into Slovakia to do their shopping there."
Czechia's unravelling clothing costs
Since 2015, Czechia has experienced the biggest clothing price increase in Europe, with inflation peaking in 2022 and 2023. It's hard to pinpoint one decisive factor, but local resellers played a significant role. Between lockdowns, they lured customers with sales while simultaneously increasing the prices of new collections to boost profits.
The price rise is evident even outside mainstream clothing stores, as Prague student Adéla, who shops mostly in second-hand stores, confirms. "For the same money, I can now buy half the stuff I used to before the pandemic. I love second-hand fashion for its sustainability and lower price, but sadly, it's not that affordable anymore."
Despite the sharp increase, Czechia remains below the European average for clothing prices.
Conclusion
For now, inflation in the EU has peaked in October 2022. It indicates that we can expect a prices won't continue to rise that *sharply*. But it doesn't mean we'll stop feeling the harsh sting of everything costing so much more. That feeling is here to stay, in part due to companies' "greedflation" which keeps costs high even if production costs have gone down, and in part due to salary increases not keeping up with inflation. In essence, this means most people are getting poorer, and that income inequality is increasing. This has even been used as a key election campaign promise, as is happening in Germany, where social democrats are pledging an increase to the minimum wage if elected.
The disconnect between pricing strategies, wage stagnation, and living costs may well become one of the defining economic and political issues of this decade.
Thanks
Thanks to Dr Charmaine Portelli at the University of Malta, whose guidance was invaluable in building this story.