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Eurozone Inflation Rate: Is Inflation Worse in Europe or the US? Even after dropping off from the highs they'd seen earlier in 2022, gas prices were still causing consumers pain at the gas pump in late 2022. All Americans felt the...

By Eric Rosenberg

entrepreneur daily

This story originally appeared on Due

Even after dropping off from the highs they'd seen earlier in 2022, gas prices were still causing consumers pain at the gas pump in late 2022. All Americans felt the sting of inflation at the grocery store, too, as 2022 saw heightened demand outpacing supply in many sectors.

The inflation experts hoped would go away after 2021 was egged on further by stubborn supply chain issues and Russia's invasion of Ukraine – which continues to instill fear and uncertainty in the global economy.

Even with core inflation dropping below 6% for the first three months of 2023, experts anticipate the Federal Reserve will push one more rate hike into effect before the year's end to curb inflation. Remember that the Fed's target inflation rate is just 2%, so the 5% increase in the all-items index in the CPI's March report is still above what it should be.

But could it be worse? As it turns out, it absolutely could.

Key Takeaways

  • Many experts initially thought inflation in the U.S. would be more stubborn than in Europe because of pandemic-era stimulus checks and higher demand levels.
  • The Russian invasion of Ukraine changed this situation. Europe's proximity to Russia and reliance on Russian exports are at least partially responsible for inflation in the eurozone.
  • Inflation creates unique concerns for investors, whether they're trying to invest in foreign markets with the U.S. dollar or contemplating the economic consequences of a global recession on the U.S. stock market.

Is inflation worse in the eurozone or the U.S.?

Overall, inflation is worse in the eurozone than in the U.S. When we look at individual countries in the eurozone, though, we see that the U.S. ranks above some European countries while it ranks below others.

Inflation in the U.S. in March 2023 was up 5.0% year-over-year. Eurostat, the statistical office of the European Union, has predicted the eurozone will have an annual inflation rate of 6.9% for the month of March. The official data for Europe should be released later this month.

If we only look at G20 European countries, the U.S.'s inflation rate doesn't look so bad compared to most. For greater accuracy, we'll only use official inflation numbers from February 2023.

  • Italy: 9.8%
  • Germany: 9.3%
  • United States: 6.0%
  • France: 7.3%

Other eurozone countries that are suffering from worse inflation than the U.S. include:

  • Estonia: 17.8%
  • Lithuania: 17.2%
  • Latvia: 20.1%
  • Netherlands: 8.9%
  • Slovakia: 15.4%
  • Austria: 11.0%
  • Portugal: 8.6%
  • Slovenia: 9.4%
  • Greece: 6.5%
  • Ireland: 8.1%
  • Cyprus: 6.7%
  • Finland: 8.0%

While it's no longer in the eurozone, inflation in the UK was up to 10.4% in February 2023.

Why is Inflation Higher in Europe?

Over the last year, inflation has been a persistent problem across the globe. The pandemic and its related supply chain issues spurred the issue initially. During the pandemic, the U.S. government issued stimulus checks to help people struggling with unemployment and stimulate economic activity.

However, stimulus checks partially encourage inflation by increasing demand for products whose supply chains were interrupted by the pandemic.

Russia's invasion of Ukraine in February 2022 also contributed to inflation, but it didn't affect all economies equally. The energy and food sectors are two of the most significant areas where we saw inflation worldwide after the invasion.

Ukraine is known as the breadbasket of Europe. Huge populations outside of Europe depend on Ukrainian exports for sustenance, too, but the eurozone was hit particularly hard after the war began.

The U.S. and Russian Energy

While large swaths of the planet are varying degrees of dependent on Russian oil and natural gas, European countries were some of the hardest hit after they imposed sanctions on Russia after the invasion.

The U.S. had always depended less on Russia for resources like natural gas and food – even before the aggressive sanctions it placed on Russia throughout 2022. Petroleum imports from Russia accounted for 8% of the U.S.'s supply in 2021. The U.S. has its own strategic petroleum reserve (SPR), which President Biden drew from throughout 2022 to stabilize gas prices.

Part of why the U.S. is less dependent on Russia is pure necessity. Natural gas is a difficult commodity to transfer. The U.S. is far enough removed from Europe geographically that, over the decades, it has had to build its own infrastructure in this regard. It also helps that Canada has a booming natural gas industry in the North American continent.

The geographic distance also makes it harder for the U.S. to provide this resource to its European allies when they need it most. As winter crept into the European continent's northern latitudes, the demand for these energy resources increased, worsening the supply problem – and, by extension, inflation.

How has Europe Battled Inflation?

Monetary policy in Europe looks much like it does in the U.S. The Federal Reserve and the European Central Bank (Europe's Fed equivalent) aggressively raised rates throughout 2022 to combat inflation.

Lowering inflation is one possible outcome of these rate hikes, but another probable outcome is a recession.

People tend to spend less when borrowing becomes too expensive, which can drive inflation down. But as consumers spend less money, companies' profit margins tend to shrink, resulting in layoffs as corporations attempt to trim their budget by cutting labor costs. When employment is hard to obtain, income becomes more scarce, making it even harder to afford essential goods.

The good news is that these monetary policies appear to be lowering inflation. Experts feared that if inflation hadn't decreased and the U.S. or EU called a recession, it would result in more people with less money competing for already-too-expensive necessities. Instead, most countries in the EU have seen their inflation rate going down in recent months.

This is only true for some countries, though. For example, Latvia has not been able to bring its annual inflation rate below 20% for the past five months. Early estimates of March inflation data suggest they'll finally get under that threshold, but we'll have to wait to see.

Germany, too, has yet to see its annual inflation rate drop as quickly as a country like Belgium. In fact, Germany's inflation rate increased by 0.1% between January and February of 2023, though Eurostat estimates the rate will drop by 1.5% for March to 7.8%.

What Does European Inflation Mean for Your Investments?

Global recessions have a significant impact on international markets. When people aren't feeling great about their pocketbooks, they're less likely to throw money into the market. That could be due to anxieties about what's to come or because they already don't have the extra cash to invest today.

Recessions can lead to vicious cycles in which investors become nervous about future profits for corporations and pull their money out of the market, further driving it down.

The U.S. stock market is seen as one of the most stable in the world, attracting investors from around the globe. Many experts have expressed fear that with Europeans feeling the pinch of inflation, it could mean fewer foreign dollars entering U.S. companies. This would further reduce demand and stock prices.

Inflation – regardless of which country is experiencing it – also makes it difficult for investors to confidently assess the value of a company versus the value of the stock. Less confident investors tend to be skittish, opting for safer investments or – particularly for retail investors – keeping more cash on hand.

Should I Keep Investing Even Though Inflation Has Been So High?

Market downturns are part of the plan when you're a long-term investor. While they're not fun to live through, periods of inflation and recession will happen over a 30-year-plus time horizon. The old adage in investment communities still rings true. Time in the market is better than trying to time the market.

While inflation, global conflict, and the potential of recession are all undeniably scary, they're all things that have happened before. The U.S. stock market has always recovered and then some. For example, inflation, global conflict, and economic hardships overlapped during WWII, but after things turned peaceful, we saw all three burdens ease for Americans.

If you're investing in European markets, your dollar may go further when the euro weakens. In times of high inflation, the U.S. dollar strengthens with higher interest rates. Global investors seek a safe place to store their money in U.S. bonds and equities. This phenomenon helped the USD reach parity with the euro this year for the first time since 2002.

The Bottom Line

Inflation is worse in most of Europe than in the U.S. Still, that doesn't mean either region is doing well in the battle against rising prices. During times like these, it's normal to feel anxious about your investments – even if you know that times of economic hardship are a part of your long-term investing plan.

We'll have to wait for certain development, including how some European countries will continue to respond to higher interest rates and whether the Federal Reserve will push through another rate hike before the end of 2023.

The inflation we're seeing today was partially caused by the Russian invasion of Ukraine, pandemic-related stimulus checks, and supply chain issues caused by the pandemic. As supply and demand imbalances shake out over time, inflation will hopefully continue to wane.

The post Eurozone Inflation Rate: Is Inflation Worse in Europe or the US? appeared first on Due.

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