We’ve mentioned inflation in Germany in a previous post, but what about the high levels of inflation outside of the Eurozone? Wouldn’t that be evidence that the euro is not to blame?

The Money Changer and His Wife, by Quentin Matsys

Inflation in Poland

Year over year inflation in Poland has reached 6.8% in October of 2021. This makes it the highest inflation Poland has seen in twenty years. The National Bank of Poland has responded by raising interest rates with 75 basis points (0.75%) from 0.5% to 1.25%. The National Bank says the inflation is mostly caused by increases in the prices of commodities, energy, and supply chain disruptions. Poland, luckily, also has relatively high real wage growth.

Inflation in Hungary

In Hungary inflation reached its highest levels in nearly a decade, hitting the 5.5%. Still, if Hungary can combine the inflation with continued real wage growth, its citizens may not be too affected.

Inflation in Romania

In Romania the OTP Bank predicts an end-of-year inflation level of 8%. However, similarly as in Hungary, inflation goes hand in hand with rising wages.

Difference between Germany and the non-Eurozone

One primary difference is that Hungary, Romania, and Poland control their own currency and their own central bank. In a response to rising inflation, their central banks are hiking rates in an attempt to reduce inflation. Whether that’ll work entirely, partially depends on what is causing the inflation. Monetary policy can only reduce inflation caused by monetary policy. However, monetary policy has definitely been one factor pushing up inflation, with interest rates at record lows for over a decade.

The second difference is that these countries also see wages rising – real wages, adjusted for inflation. They are playing catch-up to Western Europe which did not have to endure decades of communism. In Germany, real wages decline nearly as often as that they rise. Wages are a lot stickier in Germany, and are likely to lag behind even when inflation takes off.

All in all, while other countries can influence their own destiny, Germany is dependent on the European Central Bank. And the ECB likely cares more about not bankrupting Spain and Italy, than that it cares about pensioners in Germany losing purchasing power.