A sign of how fast inflation is rising is that in September last year it stood at 2.1% in the euro-zone. Across the Union as a whole there are wide differences with the Netherlands having the lowest rate at 1.9% and Latvia the highest at 16.6%.
Inflation "still comparable to 10 or 20 years ago"
Breakneck economic growth in China and Asia more generally is driving food and fuel prices higher. As Robert Goebbels - who has represented Luxembourg in Strasbourg since 1999 - says, "the Chinese and people in some other countries have started eating meat. Around 60% of the agriculture production goes into feeding cattle."
"Combating inflation will be difficult with the high food and oil prices. Governmental policies of fighting climate change by rising energy prices will finally affect consumers' spending," he said.
Swedish Member Gunnar Hökmark is more positive about current trends: "we still have rather low inflation thanks to better competition in number of markets and the effects of globalisation, which supplies more products for lower prices. Even if interest rates have been increased during the last one and a half year, they are still comparable to 10 or 20 years ago."
Call to keep VAT low
The Swedish MEP went on to say that "it is not a coincidence that some of our new member states have higher inflation. They have good opportunities to have high growth. Growing economies in the new member states need buildings, new factories, new investments and that creates a demand push. And thus they are contributing to higher average inflation EU-wide."
The role that governments and the EU are playing in pushing up inflation was stressed by Mr Goebbels. "Differences in inflation rates nationally partly reflect administrative price rises, taxes and governments pushing up prices on a local level. For example, Luxembourg adjusts the prices of certain public services twice a year on the basis of an index. This is why the inflation in Luxembourg is higher than in some neighbouring countries."
He added, "the EU should stop pushing for VAT raises for a while. The European Commission is asking new Member States to raise excise taxes on gas, oil and diesel to harmonise taxation within the Union. The European Commission should try to avoid tax increases and the increase in administrative prices."
Mr Hökmark urged governments to embrace reform - "governments play a most crucial role in keeping inflation and interest rates down over the long term. Reforms are needed to make sure that we have good competition in different sectors. The authorities should take public finances under control to stop them from stimulating inflation."
Are higher interest rates the answer?
Inflation increases when more money circulates. When interest rates increase, people invest less due to higher credit costs and prefer to save in banks which offer better savings rates. Higher interest rates can "suck" the money from the market, tackling inflation and cooling growth.
Mr Goebbels urged the ECB to hold steady to its policy of keeping inflation down. "I hope they will stick to the current level of 4%. Imported inflation cannot be combated by raising interest rates!" Mr Hökmark would like to see politicians kept out of the decision-making process, "the ECB should judge by itself how to implement interest rate policy. This is not supposed to be a matter for political consideration. We need the most rational decision based on cold equations."
Should people get higher wages?
Whilst the rate of inflation is eroding s purchasing power, there are calls for higher wages to compensate. However, many economists believe that higher prices will stimulate higher prices and thus boost inflation in a "price-wage" spiral.
Mr Goebbels calls for a measured approach - "it is the Union's role to defend the purchasing power of ordinary people. But this could lead to a price-wage spiral. We need a balance".
Mr Hökmark ends on a moderately optimistic note. "In general the average purchasing power of EU citizens is increasing, mainly thanks to economic growth. Growing in purchasing power is counterbalanced to a certain extent by price-rises. However in absolute terms, we still can buy more then before. In the last decade we had more growth than inflation."
In June the president of the ECB, Jean-Claude Trichet, will have a question and answer session with the Economic and Monetary Affairs committee - one of the four times he comes to the parliament a year.
Source: European Parliament
Mike Hitchen, Mike Hitchen Consulting Publisher of
i On Global Trends and Sydney Irresistible
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