Europe’s Inflation Rate Is Soaring Thanks to Bad Policy

In April, the UK’s inflation rate reached 9% – which is four and half times higher than the Bank of England’s ‘inflation target’. What’s more remarkable, though, is that 9% is low by comparison to some other countries in Europe.

In the latest month for which data were available, the inflation rate reached 10.7% in Hungary, 11.3% in Greece, 14.4% in Bulgaria, 18.9% in Lithuania and an astonishing 20% in Estonia! Even notoriously inflation-phobic Germany logged a rate of 7.9% in May – the highest in decades.

You have to see the numbers plotted to fully appreciate what’s happening. Here’s Germany’s inflation rate over the last 25 years:

The rate hadn’t gone above 4% since the early 1990s. Now, in just the last eighteen months, it has reached double that level. The same is true for the Euro Area as a whole – where the latest monthly figure was more than 8%.

Europe’s sky-high inflation rates are partly the fault of supply-chain disruption during the pandemic. However, that’s far from the whole story. After all, some developed countries are still reporting quite low inflation rates: Japan’s is 2.5% and Switzerland’s is 2.9%. Even Australia – which endured more days of lockdown than Europe – has a rate of ‘only’ 5.1%.

The major culprit, of course, is the rising cost of energy – a trend which began last year, and has been exacerbated by Russia’s invasion of Ukraine. Indeed, one can’t help but notice a strong correlation within Europe between dependence on Russian energy and the current rate of inflation (though Finland, oddly, is an exception).

As I noted before, a lesser-known reason for sky-high fuel prices is lack of refining capacity. Dozens of refineries were shuttered during the pandemic, when demand for oil was way down. And it seems that no one bothered to think about the consequences once demand for oil picked up.

One major reason companies haven’t been upgrading their refineries, or building new ones, is the global shift away from fossil fuels. Why risk millions on a new refinery when governments are pursuing “Net Zero by 2050”? Note: refineries aren’t the kinds of things you can put up or take down at your convenience – their expected lifespan is on the order of decades.

Even if “Net Zero” is a worthy goal, rushing toward it without care for consequences is surely self-defeating: any policy that contributes to soaring inflation is unlikely to remain in place for long.