How and why inflation is beating down in Romania, Poland, the Czech Republic and Hungary
In October, inflation increased by 5.8% in the Czech Republic, by 6.5% in Hungary and by 6.8% in Poland. According to reports from Le Monde, this year it is expected to increase by 7% across Central and Eastern Europe, compared to 3.7% in the euro area
Soaring commodity prices, supply shortages, labor shortages and wage increases are driving prices in Romania, Poland, the Czech Republic and Hungary.
For days, the inhabitants of Timisoara, in western Romania, have been starting their day with the same ritual: anxiously feeling their radiator. On October 26, more than 50,000 homes, as well as schools and hospitals in the city, were left without heating and hot water for several days.
The reason: the surge in energy prices has pushed the local heating company, Colterm, to the brink of bankruptcy. Faced with the accumulation of unpaid bills, the gas producer E.ON has stopped supplying it. Since then – writes Le Monde – the municipal authorities have been fighting with other suppliers to obtain gas and coal for the Colterm plants. But deliveries are erratic. Thus, as the country enters winter, Timisoara's heaters do not heat every day.
In October, the Romanian consumer price index rose 7.9% year on year, the highest in a decade, according to the National Statistics Institute. This is largely due to the surge in gas prices (+ 46%), and the figures are staggering even in neighboring countries.
In the same month, inflation increased by 5.8% in the Czech Republic, by 6.5% in Hungary – the highest since 2012 – and by 6.8% in Poland. According to forecasts by the British consultancy Oxford Economics, this year it is expected to increase by 7% across Central and Eastern Europe, compared to 3.7% in the euro zone.
"This region is where the risk of seeing a sustained price increase in the coming years is the highest," said Liam Peach, of UK firm Capital Economics.
"For the time being, this inflationary shock is largely related to rising commodity prices and supply problems, particularly in countries highly integrated into European production chains," noted Rafal Benecki, an economist at ING. Warsaw.
And, not surprisingly, families are the first to suffer. In Romania and Hungary, heating and energy costs account for 25% and 22% of household expenses, respectively, compared to 7% in Germany, according to the European Bank for Reconstruction and Development (EBRD). "The pressure on governments to take measures in favor of these families will increase," said Beata Javorcik, chief economist of the EBRD.
THE DEFICIENCIES OF THE LABOR MARKET
Some have started doing it. In an effort to appease the electorate ahead of the 2022 parliamentary elections, the cabinet of Hungarian nationalist Prime Minister Viktor Orban announced on Thursday 11 November that petrol and diesel prices at the pump will be capped at 480 forints (1.31 euros) per liter for the next three months. Romania is considering similar measures.
However, inflationary pressures are not new in the region: they were already evident before the pandemic. "Covid froze the phenomenon, but in 2019 the shortages in the labor market and low unemployment were already pushing the price index up," recalls Liam Peach. In the spring, the strong economic recovery stimulated hiring.
According to Eurostat, the unemployment rate fell in September to 3.9% in Slovenia, 3.6% in Hungary, 3.4% in Poland and 2.6% in the Czech Republic, far from 7.4%. registered in the euro area.
“Everyone is struggling to hire,” said Sandor Baja, Randstad's general manager for Hungary, Romania and the Czech Republic. “Especially as more and more Western European and Asian groups such as Atos, Citigroup and India's Tata, they are opening IT and administrative service centers in the region ”.
SALARY INCREASE
These labor shortages are exacerbated by the brain drain to the West and the decline in the working population, linked to the low birth rate. "Every year in Hungary, the number of people who retire exceeds the number of people entering the job market by 50,000," Baja said. This lack of candidates is fueling rising wages and, in turn, rising prices.
In the Czech Republic, the minimum monthly wage increased from 11,000 to 15,200 crowns (from 435.40 to 601.70 euros) between January 2017 and January 2021. On November 5, the government announced that it would rise to 16,200 crowns in January 2022. (641.22 euros), while the average salary (38,275 crowns, or 1,507 euros) increased by 11.3% in the first six months of the year.
In Hungary, Viktor Orban promised to raise the local minimum wage from 167,400 to 200,000 forints (from 458.90 euros to 548.29 euros) in early 2022.
The increases are even more marked for the more qualified positions. And to cope with it, companies have no choice but to pass it on in pricing. "In the region, labor market shortages and wage increases are key to understanding inflationary dynamics," Benecki explained.
In the coming months, they will continue to fuel price increases as the effects of the surge in commodity prices may wear off. “Especially since pensions in many of these countries are also indexed to wages or inflation,” added Javorcik.
MONETARY EXTENSION
Central banks have begun to act to curb these increases. On 3 November, the Polish monetary institution raised its benchmark rate from 0.5% to 1.25%.
On November 4th, its Czech counterpart surprised by raising its rate from 1.5% to 2.75%. "This is the fourth increase since June and the highest since the mid-1990s," noted Tomas Dvorak, a country specialist at Oxford Economics.
This monetary tightening, which is also underway in Romania and Hungary, should slow down prices and credit, without damaging too much short-term growth, economists say. There is some debate on labor market developments in the region. The labor shortage could limit future growth, although the automation of production lines, which has already started in the automotive industry, could partially compensate for the lack of manpower. “In Poland, the 1.5 million Ukrainian emigrants also cover some needs in certain sectors”, underlined Benecki.
The ecological transition could also destroy jobs in traditional industries and cause a new rise in unemployment. “A lot of training will be needed to reorient employees towards new digital and sustainable development professions,” concluded Dvorak.
(Extract from the foreign press review by Epr Comunicazione)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/come-e-perche-linflazione-picchia-in-romania-polonia-repubblica-ceca-e-ungheria/ on Sat, 20 Nov 2021 06:38:28 +0000.