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Along with the U.S., Europe is hit with extraordinarily high inflation numbers


Soaring consumer prices aren't just a problem in the U.S. As President Biden met with Federal Reserve Chair Jerome Powell about the highest inflation rates in decades, the European Union's statistics agency yesterday released its own record numbers. Prices last month climbed 8.1% compared to May of last year in countries that use the euro. Holger Schmieding joins us now from Berlin to talk about what the Eurozone is facing. He's the chief economist at Berenberg Bank. Good morning.


FADEL: So let's start with bankers being caught off guard, it seems, in the U.S. and in the Eurozone. They didn't seem to fully anticipate just how high inflation numbers were going to get. Why is that?

SCHMIEDING: That's absolutely correct. And this is very much true for Europe, where the inflation that we are having is exclusively the result of higher prices for energy, food and a result of these logistic logjams exacerbated recently by the Chinese lockdowns. And unlike in the U.S., where you had an excessive fiscal policy during the pandemic and hence a very strong boom in consumer spending on goods, which nourished inflation, Europe does not have that. Our inflation is high. It's almost as high as in the U.S. But that's because we are more exposed to the sky-high prices for energy, including natural gas, as a result of Putin's war against Ukraine. And that's the problem for the central bank because the inflation in Europe has nothing to do with domestic policies.

FADEL: Right.

SCHMIEDING: Well, it's difficult for them to do much about it, at least in the near term.

FADEL: But other major central banks, the Federal Reserve, the Bank of England, responded faster than the European Central Bank in the face of inflation. Why?

SCHMIEDING: The European Central Bank is slow in responding. But once again, that's because the inflation that we have on the European continent has nothing to do with the domestic situation. For example, in the U.S., we have wage gains of 5%-plus. In the United Kingdom, we have wage gains of 5%-plus, which is probably, in the long run, more than is compatible with, say, a 2% inflation rate. In the eurozone, however, wage gains are only in the range of 2% so far because of the lack of domestic reasons for inflation. The European Central Bank has been looking at the data for longer, wondering what to do. But it has now come to the conclusion that in order to hold back inflation expectations, in order to prevent wages from reacting a lot later on to the high prices that the European Central Bank now thinks it has to act. And that is correct.

FADEL: Now, rising prices are not hitting all eurozone countries in the same way - right? - Estonia getting it the worst right now. What accounts for that?

SCHMIEDING: It is largely the phenomenon that some countries are more exposed to Russia, are more dependent on Russian energy or, in their turn away from Russian energy, now have to pay the very high prices that you need if you suddenly switch away from that.

FADEL: Right.

SCHMIEDING: Also, as a general rule, a country that is somewhat poorer or a region that is somewhat poorer, in that region, people spend a higher share of their income on energy and on food - that is, on these two things which have now skyrocketed in prices...

FADEL: Right.

SCHMIEDING: And that accounts for a major part of the difference within the eurozone. And probably, if you look at the U.S., you would find some similar phenomenon between different regions with different degrees of per capita income.

FADEL: How significant is the difference in inflation rates across the European Union, if you could give us some example?

SCHMIEDING: It is quite significant. At the top, we have inflation rate of close to 20% in Estonia. At the bottom, we have inflation rate slightly below 6% in France. That's a huge difference. In France, part of this below-average inflation is the result of the government just capping energy prices and cutting some taxes.

FADEL: Now, what tools does the European Central Bank have for helping people face these intense prices?

SCHMIEDING: Well, the central bank has no tools for that, actually. The ones who have the tools are the finance ministers, who can pay subsidies or governments that can intervene in energy markets, which may not be efficient, but which can, to some extent, restrain the rise in prices. The only thing a central bank can do is to curtail the overall growth of the economy, so that as a result of that, with less demand or less demand growth, there is less overall pressure on prices. But the central bank has no tool to selectively help those who need help most.

FADEL: Holger Schmieding is chief economist at Berenberg Bank. Thank you so much for your time.

SCHMIEDING: You're welcome. Thank you. Transcript provided by NPR, Copyright NPR.