A new inflation Iron curtain is dividing Europe

The inflationary tempest that reigned supreme for three tumultuous years appears to be abating, taming a period of historic highs across various nations. This fiscal respite affords journalists the chance to reflect on the phenomenon’s genesis, dissecting the peculiar mosaic of its geographical spread – a tapestry woven from threads of historical contingency.

In the inflationary sweepstakes that have beleaguered Europe, Hungary has emerged as the European Union’s most afflicted member state. Midway through the yesteryear, the nation weathered an inflation rate nearing 20%, an unruly spike that saw it outpace the EU mean by a factor of three and its high-inflation peers – Poland, the Czech Republic, and Slovakia – by nearly two-fold, as per the ledger of Eurostat.

In a bid to quell the rampant cost escalations, the Fidesz-led government under Viktor Orbán instituted a regimen of price caps spanning from petrol to pasta throughout 2022. Yet this interventionist gambit has recoiled, engendering scarcities within one of the globe’s most trade-dependent economies, and paradoxically fanning the very flames of inflation it sought to extinguish. Now, as the tide of inflation recedes with alacrity, Gábor Kovács of the economic journal HVG observes a stark irony: the easing of price pressures “signals not prosperity but penury.

This decline owes much to a drop in energy prices, precipitated by a grim calculus – Hungarian households are scrimping on heating, a testament to dwindling financial reserves.” Echoing this somber analysis, the GKI economic institute, as cited by HVG, paints a stark picture: “Hungary now languishes as the poorest in the union. The Hungarian consumer’s purchasing power has dwindled, with 7.9% fewer goods taken home in 2023 compared to 2022, despite an average family spending an additional 327,000 forints (about 840 euros) over the same period. Hungary’s consumer activity, it appears, has bottomed out in the EU, with even Bulgaria, historically trailing, set to surpass it.”

The Baltic tigers are not immune to the inflationary maelstrom, with Latvia’s economy particularly buffeted by rates topping 20%. As the Friedrich Ebert Foundation study illustrates, economic prosperity – or the lack thereof – shapes inflation’s impact. In Latvia, a relatively poorer society, the average household expends 23.3% of its income on food, 14.6% on housing, and another 14.6% on transport. The daily Diena reports that inflation remains a specter across the Baltics, despite a noteworthy drop in Latvia in the last six months, leaving consumer prices at year’s end only 0.6% higher than in December 2022. Nonetheless, prices stubbornly sit at 30-50% above figures from three years prior. As 2024 commences, Baltic residents primarily fret over food costs, but in Latvia, the specter of rising healthcare and medicine prices looms larger than in its neighbors.

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On the pages of the Czech economic daily Hospodářské noviny, economists Tomáš Adam and Jiří Schwarz note the historical conditionality of high inflation in Central and Eastern Europe, which has plagued these countries regardless of the currency in circulation. “A curtain has been lowered across Europe. This time, it divides the continent into two blocks not by ideology, but by inflation: in the last two years, countries in the east have had higher price growth, while countries in the west have had lower inflation” the authors write, explaining that the border passes through similar places to the one Churchill named in his famous speech almost 80 years ago. The erstwhile Iron Curtain now heralds a split in price surges, with Eastern nations grappling with heftier inflation than their Western counterparts.

The economic chasm left by the Iron Curtain has endured, with Eastern Europe once stifled by inefficient, energy-intensive industries reliant on cheap Soviet fuel. Though the fall of the curtain sparked a gradual convergence, the East’s living standards still trail those of the West. Before the recent historic energy shock, Central and Eastern European (CEE) countries had a price level approximately 30% below the EU average, with services costing about 40% less, reflecting the wage disparities with the West.

Consequently, the lower-income residents of CEE spend a larger slice of their budgets on essentials like food and energy, amplifying the impact of their rising costs on overall inflation. As the economies of CEE gradually align with Western standards, the region is expected to catch up. The higher inflation witnessed over the past two years in lower-income countries is seen as a convergence accelerated by cost shocks—a trend that is likely to persist with upward wage pressures in the near future. 

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In partnership with Display Europe, cofunded by the European Union. Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union or the Directorate‑General for Communications Networks, Content and Technology. Neither the European Union nor the granting authority can be held responsible for them.

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