Development of consumer prices in 2023 and 2024
Inflation rate falls for the second year in a row
The inflation rate in Europe continues to fall. After peaking at 9.2 percent in the European Union in 2022 due to the COVID-19 pandemic and the war in Ukraine, inflation fell to 6.4 percent in 2023. Energy prices had a significant influence on price increases, impacting not only the cost of fuel and heating, but also indirectly affecting the production costs of food and goods.
In countries that are less dependent on imports for their energy mix, inflation was correspondingly lower. Switzerland, for example, relies on hydropower, while Denmark generates more than half of its electricity requirements from wind power. At 2.8 percent, Switzerland had one of the lowest inflation rates in Europe last year. Denmark was able to reduce inflation to 3.4 percent by maintaining a stable exchange rate against the euro and refraining from devaluing its own currency. Thanks to government measures to reduce energy prices, Belgium had the lowest inflation rate of all 27 EU member states at 2.3 percent. These measures expired at the end of the year, meaning that Belgium is the only country in Europe to expect a higher inflation rate this year than in the previous year.
However, the energy crisis was not the only reason for price increases. Droughts and heatwaves in Spain, Portugal, Italy and Greece led to a significantly smaller olive harvest, which caused olive oil prices to skyrocket. In Spain in particular, the world's largest olive oil producer and exporter, half of the olive harvest fell victim to the drought. The Spanish government responded by reducing the value-added tax rate to 5 percent in 2023 and declaring olive oil a “basic necessity” this year. This resulted in a permanent reduction in value-added tax.
The highest inflation rate within the EU was recorded in Hungary at 17 percent. This development was also due to the government, which paid out tax refunds of around 3 billion euros to the population. This led to increased demand and thus to price increases. In addition, price limits were introduced for eight basic food items and a special levy for large food chains. As a result, retailers raised the prices of other, uncapped products to compensate. Other Eastern European countries, including the Czech Republic, Slovakia and Poland, also saw double- digit inflation rates. High inflation in the Czech Republic led many Czechs to go shopping in neighboring Poland, where value-added tax on food and everyday goods was reduced to 0 percent last year. This measure in Poland was discontinued at the end of 2023.
An inflation rate of 2.7 percent is forecast for the 27 EU member states in 2024. Although the European Central Bank’s target of 2 percent will not yet be reached, price increases will be significantly more moderate than in 2022 and 2023.
In addition to the continuing fall in the inflation rate, the outlook for Europe is also quite promising in other respects. The costs of limiting inflation through rising key interest rates by the European Central Bank or the national banks have so far been limited. In addition, the feared increase in unemployment as a result of the interest rate hike has not yet materialized. In June 2024, the European Central Bank lowered its key interest rate for the first time in years, albeit only minimally. The EU economy is also recovering slightly after a long period of stagnation. Although the growth rate of 0.3 percent forecast for the first quarter of 2024 is still below the estimated potential, it exceeded expectations.
inflation in 2023 in EU-27
expected inflation in 2024 in EU-27
