🇪🇺Prices are rising

#6

The Story

Devaluation. 

Do I have to read this?

It's about the value of your money.

Go on. 

The annual inflation rate in the 19 countries that use the euro currency is at a 10-year high of 3 per cent (according to the EU's statistics office Eurostat). That means, on average, goods and services have become 3 per cent more expensive within a year.

Why? 

Above all, the energy costs went up. The energy sector recorded the highest annual increase, at 15.4 per cent, far ahead of industrial goods excluding energy (2.7), food, alcohol and tobacco (2), and services (1.1).

What does this have to do with devaluation?

You get less for the same money. That is why most central banks try to keep the money stable. More precisely, the goal of the central bank is to allow little inflation. The European Central Bank's goal is 2 per cent. 

Can the central bank do something about rising prices?

They can, but right now, the European Central Bank (ECB) is doing almost nothing. The inflation is likely due to the reopening of economies and worldwide supply issues. Increased demand has caused prices to rise. Therefore, inflation might be temporary. 

And if not?

The central bank will tighten the reins. That means it will increase interest rates to slow the growth of the money supply and bring down inflation. 

Huh? Explain.

Increased demand has caused prices to rise. Therefore, the price increase initially has nothing to do with monetary policy. Nevertheless, the central bank has the goal to counteract monetary devaluation. The means of the central bank to fight inflation is to reduce the supply of money. However, if the central bank is forced to reduce the money supply in order to keep prices in check, this could negatively affect economic development. 

Why?

The central bank sets the rates it charges to loan money to the nation's banks. When it raises or lowers its rates, all financial institutions tweak the rates they charge from their customers, from big businesses borrowing for major projects to home buyers applying for mortgages. All of those customers are rate-sensitive. They're more likely to borrow when rates are low and put off borrowing when rates are high. Hence, by setting the rates, central banks like the European Central Bank manage money supply; and by managing money supply, a central bank aims to influence macroeconomic factors like inflation or economic growth.

Complicated. Anything else?

The current inflation rate differs between the countries of the eurozone. Among the larger countries, Germany experienced exceptionally high inflation (3.4 per cent), as did Spain (3.3) in August. Italy and France remained below average. Estonia has the highest inflation rate (5 per cent), Finland the lowest (1.8 per cent). That is a problem for the ECB: Since there is only one single currency, it can only do one single monetary policy.

It seems a single currency area has disadvantages.

Exactly. It limits the possibilities of the central bank to take adequate action against price increases in individual countries. On the other hand, with one single currency, there are no exchange costs.

Tell me what I (should) have learned. 

Higher inflation lowers purchasing power and reduces inflation-adjusted wages and interest income. Therefore, inflation affects everyone. Prices in the eurozone are currently rising. Maybe the rise is temporary. If it is not, the European Central Bank will intervene with some negative effects on European economic development.


Notes

https://ec.europa.eu/eurostat/documents/2995521/11563243/2-31082021-AP-EN.pdf/80c7e6d5-2700-b95d-6518-1f74e1458d4f?t=1630398005392 

https://www.bloomberg.com/news/articles/2021-09-09/ecb-slows-pandemic-bond-buying-amid-firming-european-recovery 

https://www.bloomberg.com/news/videos/2021-09-09/-the-lady-isn-t-tapering-ecb-s-lagarde-says-video 

https://www.investopedia.com/terms/m/monetarypolicy.asp 

https://www.bloomberg.com/news/videos/2021-09-09/ecb-s-lagarde-sees-economy-at-pre-crisis-level-by-year-end-video