Why will the inflation crisis last longer in CEE than the rest of Europe?

Why will the inflation crisis last longer in CEE than the rest of Europe?

01. 08. 2022 – Lomond

We have written quite a lot about the inflation crisis because, although it is affecting everyone, it is particularly acute in Central & Eastern Europe.

The European Commission has just published its Summer 2022 Economic Forecast, and the forecasts for inflation were particularly grim for countries in this region. Although the full year forecasts for inflation are lower than the current rates nearly everywhere, nine CEE countries fill the Top 10 list of EU member states which are expected to have the highest full-year inflation rate:

That part of the Commission’s report was no great surprise. The more disturbing forecast was that, while inflation rates are expected to calm down everywhere next year, there are still eight member states where the full-year inflation rate is predicted to remain above 5% in 2023, all of them in CEE: Poland (9.0%), Slovakia (8.2%), Hungary (7.6%), Romania (7.2%), Bulgaria (6.8%), Latvia (6.0%), the Czech Republic (5.8%) and Lithuania (5.1%).

Why is it likely to be harder to bring inflation rates under control in this region?

The Commission’s Economic Forecast does outline the reasoning behind its projections, which gives us an indication.

For the whole of Europe, the Commission blames inflation on the war in Ukraine, which has put additional upward pressures on energy and food commodity prices. That is, of course, a major factor across CEE, given how dependent most CEE countries are on Russian energy and the strength of bilateral trading links

The war doesn’t tell the whole story, though, and the country profiles for Poland and Hungary indicate a couple of other factors.

First, the section in the report on Hungary considers the impact of “tight labour markets” on inflation, which we know is a serious issue across the whole of CEE – even more than it is Western Europe.

Second, on Poland, the report mentions that supply bottlenecks are driving price growth for services and industrial goods. That’s an issue in Western Europe too, but it’s a particular challenge in CEE because many of the countries in this region are amongst the most heavily industrialised economies in the EU. Indeed, the list of 10 EU member states where industry accounts for the highest share of total gross value added (GVA) includes eight CEE countries – Slovenia (27.8%), Czech Republic (27.7%), Poland (26.9%), Slovakia (24.9%), Hungary (24.6%), Romania (23.5%), Bulgaria (22.1%) and Lithuania (21.6%):

This corresponds very closely with the list of countries where high inflation rates are expected to persist throughout the whole of next year.

In every one of these CEE countries, the Commission’s Summer Economic Forecast indicates that inflation is likely to be the dominant economic challenge for the next 18 months. And if it’s the dominant economic challenge, it will almost certainly remain the dominant political issue too.