There's inflation and then there's inflation
A few weeks ago, the annual US inflation figure for June was released. The 9.1% rate was higher than what economists expected (8.8%). That same month, the inflation estimate for the Eurozone was 8.6%. These numbers don't seem to be all that different from one another. So, are the same things happening on either side of the Atlantic?
Not quite. The Eurozone has been much more heavily impacted by rising energy and food prices due to supply interruptions caused by the war in Ukraine.
This difference become clearer if we use another indicator of inflation, so-called core inflation.
In June, US core inflation, i.e. inflation net of the price trends in food and energy goods in the United States, was 5.9%, much higher than Eurozone core inflation of 3.7% (estimate).
Inflation in the Eurozone is above all an inflation imported from abroad due to factors related to how goods and services are supplied. In the United States, inflation has a larger domestic component, due to aggregate demand exceeding supply and higher labour costs.
Demand-pull inflation occurs when the demand for goods and services outstrips supply. In these cases, prices increase and only those able to pay more will see their demand satisfied. Demand can exceed supply because supply cannot increase as rapidly as demand. This is pretty much what is happening in the United States.
But price increases can be caused by supply-side problems, too. Just think of an increase in the prices of commodities that are necessary to produce a good - for instance oil, gas or electric energy. In these cases, businesses, in order to avoid reducing their profits in the face of rising costs, raise the prices of their products. Another example of inflation due to supply factors is when supply suddenly drops because of more or less temporary reasons, such as the war in Ukraine or the COVID restrictions, which cause interruptions in manufacturing and transportation issues.
In the Eurozone, it's more these kinds of supply-side factors, rather than a jump in demand, that are responsible for the rising inflation.
What will happen in the future? Only time will tell. Inflation is often a global phenomenon, like the increase in prices for commodities for instance, which in recent months has touched every country around the world, albeit not to the same extent. As of now, however, it seems that inflation is more likely to decrease in the Eurozone than in the United States.