Only once energy prices have come down, and inflation in America has been brought under control, will global growth be able to support Europe’s recovery. But that will not happen in 2023 WorldAhead
By Christian Odendahl: European economics editor, The Economistbeen high for a while. But then, in the summer of 1922, prices started to climb dramatically. A loaf of bread that had cost 0.30 German marks in 1914 was selling for 8 marks in June 1922 and 160 marks by the end of that year. What followed in Weimar Germany was hyperinflation, which led to more than just the collapse of the currency.
Start with energy. In its war against Ukraine, Russia has wielded energy as a weapon against Kyiv’s Western backers, slashing gas exports to Europe and sending gas prices skywards. Unfortunately, many French nuclear-power stations were offline for repairs, and a drought across Europe reduced the availability of hydroelectric power. Plants running on eye-wateringly expensive gas had to fill the gap.
That will leave inflation higher than many had hoped. True, as raw energy prices stop rising, year-on-year comparisons mean inflation will shrink almost mechanically throughout 2023. But some energy prices are capped or set using long-term contracts, and so have yet to rise fully. In the rest of the economy, the energy-price shock will continue to push prices up. Wages will increase to make up for lost real income, adding to firms’ costs.
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