Prices in Europe have been rising since 2021. It was quickly defined as inflation. Some economists did not want to use this term hastily. But what is inflation? What, on the other hand, does deflation mean? And what is meant by the term stagflation?

What does inflation mean?

Inflation refers to a permanent increase in the overall price level of an economy. Not only the prices for individual goods or services are affected, but all prices and thus the price level (the average of goods prices) as a whole. This is a process of rising prices. People can buy less and less for the same amount of money.

How is inflation measured?

A price index is used as a basis. There are different ones. The price index for the gross domestic product (GDP) reflects the price development of all goods and services that are included in the GDP of a country. The price index for the standard of living or the consumer price index reflects the goods and services of daily use. A so-called basket of goods was determined. It consists of approx. 650 goods and services (in Germany). The Harmonised Index of Consumer Prices (HICP) applies to the European Union. This reflects the data of the national statistical offices of the Euro zone and the entire EU. The data are comparable due to the “harmonised methodology”.

An overview of inflation developments in Europe by HICP for individual countries is provided by EUROSTAT (2013-2021). The statistical office of the European Union also published up-to-date figures on inflation by economic sector (2022).

What are the reasons of inflation?

They are usually complex and controversial; there are various opinions on the subject.

Some economists argue that an expansion of the money supply in relation to the supply of goods must inevitably lead to inflation. This view is rejected, among other things, by stating that there should then already have been a big inflation in the last 20 years. After all, the volume of money in the world is many times larger than the value of the world’s gross social product.

There is widespread agreement that inflation can be demand- and/or supply-driven.

Inflation triggered by the demand side of an economy can occur, for example, when many citizens stop saving and spend money on consumer goods at the same time. Or when companies invest in large numbers and demand machines in return. Or when a country’s products are bought abroad in particular quantities and production cannot keep up.

Similarly, a strong price increase affecting all prices can be triggered by the supply side of an economy. An example is the so-called wage-price spiral: due to the market power of companies, profit expectations dominate price formation (profit push inflation). Conversely, trade unions can push through wage increases due to their power (if any). If companies do not accept to make lower profits or if they can not compensate for the increased wages through higher productivity, they will pass these higher costs on to prices. They rise. Workers’ representatives, for their part, try to compensate by raising wages. And so on.

Inflation – price increase

A price increase should not be confused with an inflation. It affects only individual goods or occurs only in some segments of an economy. A price increase can also lead to an increase of the general price level, since individual products are components of many other products, such as oil or gas.

The situation in 2022

At present, the prices for energy (especially gas and oil) and food are rising. Since energy is needed for the entire production and since without the (fossil) energy sources an economy is not possible under capitalism, many other prices are rising as a result.

What are the reasons? With the start of the Russia-Ukraine war in February 2022, gas prices jumped. This is due to a gas shortage as a result of the sanctions against Russia and the reduced supply of oil and gas by Russian operators. The reduced supply meets a liberalised market for example in Germany, so it seems that even long-term supply contracts of gas are linked to the stock exchange price of gas. In this situation, the German government commissioned a private company, Trading Hub Europe (THE), to buy gas on the stock exchanges in large quantities. This strong demand from a large customer on behalf of a government drove prices up artificially. They are distorted. Critics argue that this could have been avoided if THE had regulated the buying and selling of gas through future contracts as usual.

In addition, there is the so-called merit order principle on the electricity stock exchange: all suppliers charge according to the price of the most expensive producer. At present, this is the gas-fired power plants. As a result, much cheaper suppliers, for example of green electricity, nevertheless sell their electricity at high prices. By calculating the electricity prices, they make high profits, which can be equated with non-performing income (rents). They are paid by the consumers through their bills.

Inflation is therefore not something that suddenly befalls a society. It can be caused by different developments and activities of different players. It can also be caused by wrong political decisions.

Consequences of inflation for an economy

Inflation affects people differently. If their income does not rise at least as much as prices, they can buy less for the same money. This hits people with „small wallets“ particularly hard. They include the unemployed, families affected by child poverty or people in old-age poverty. Inflation damages their livelihoods.

Inflation leads to losses for creditors and gains for debtors. Those who have invested money or assets lose them. This is because it is worth less when prices rise, but not when interest rates rise. In a mirror image, debtors gain who have taken out a loan. If the inflation rate is higher than the interest rate at which a loan was taken out, they pay back less debt. This can also affect the state, which can thus reduce its public debt.

What does deflation mean?

This refers to a reverse development. Prices fall over a longer period of time and in different sectors of the economy, so that the overall price level falls. Companies stop investing because they expect prices to fall even further and they do not make a profit. Likewise, consumers hold back because they expect products and services to become even cheaper. A recession threatens. But the value of money is rising.

What does stagflation mean?
This word is a compound of “stagnation” and “inflation”. It indicates that in the real economy (the production and consumption of goods and services) there is only low growth and often also unemployment. Economic development is stagnating. At the same time, on the monetary level of the economy, there is a permanent increase in prices in almost all areas of the economy.

Stagflation is often triggered by so-called supply shocks. Examples are the energy crisis in Europe at the latest since 2022 or disrupted supply chains as a result of the Corona crisis in 2020-2021 and others. As a result, production comes to a standstill, and at the same time products become more expensive.

How to cope with inflation?

Tackling the causes

The first step is to address the causes of the constantly rising prices. In the context of the current situation (2022), this means a) gaining access to cheap oil and gas and b) changing the pricing mechanisms in the oil and gas markets.

Central bank policy

The central bank of an economic area shall ensure a stable price level. (The US Federal Reserve also has to consider effects of monetary policy on the labour market). In “normal” times, the European Central Bank aims for an inflation rate of close to 2%. This is seen as necessary to enable growth. If inflation occurs, it can raise interest rates. As a result, less credit is taken out, less is invested, less is produced, sold and demanded. This can have a dampening effect. But it can also usher in deflation. This danger exists if the causes cannot be remedied with such an interest rate policy.

Tips for each individual

The recommendations depend on the wealth situation of each individual.

– Try to understand the situation, recognise the causes and assess possible developments.

– If inflation is forecast to continue over the long term: purchase long-term consumer goods now (e.g. printer, PC, duvets, bicycle).

– If medium-term or temporary inflation is expected: refrain from buying durable consumer goods.

(However, both strategies are rational from the point of view of an individual. If many act in this way, this can have a crisis-reinforcing effect.)

– Acquire real estate or/and territory, preferably such that can also be used for agricultural purposes.

– Join others to form cooperatives or active circles of friends who support each other and grow their own food.

– Acquire silver and/or gold as a means of exchange in the extreme case of currency failure.

– Keep cash on hand, as there may be a bank run due to several crises going on at the same time.

– If necessary, purchase shares or bonds after consultation with various providers and e.g. consumer protection organisations; take into account ethical aspects (no shares for war and armaments industry) as well as economic developments (future of medium-sized companies).

– Stockpiling for crises: Information should be provided by the Ministry of the Interior of each country. Other advice can be found in numerous internet sources.

– Don’t buy brand-name products, others are just as good but cheaper.

– Buy longlasting, energy-saving household appliances.

– Take out only necessary insurances and contracts and cancel them if necessary, for example mobile phone contracts, newspaper subscriptions, repair insurance, insurances for glass, glasses, mobile phones, etc.

– Get politically involved for an economic policy in which inflation and deflation are unnecessary. Democracy needs participation! The power of citizens is bigger than they often think.


Brächer, Michael / Schultz, Stefan, Deutschlands teure Gashamsterei, DER SPIEGEL, 42/2022, 14.10.2022, (03/09/2022)

Budzinksi, Oliver / Jasper, Jörg / Michler, Albrecht, F., Inflation, in: Gabler Wirtschaftslexikon, (03/09/2022)

European Central Bank | EUROSYSTEM, Inflation measurement and the strategy review, (03/09/2022)

EUROSTAT | Euro indicators, Flash estimate – October 2022
Euro area annual inflation up to 10.7%, (31/10/2022)

EUROSTAT, HICP – inflation rate, (30/10/2022)

Merit Order, in: Wikipedia, (03/09/2022)

Mitteldeutscher Rundfunk, Kurz erklärt – das Merit-Order-Prinzip, (03/09/2022)

Wohltmann, Hans-Werner, Stagflation, in: Gabler Wirtschaftslexikon, (03/09/2022)

The Estonian Economy: Growth by 4.5 per cent in 2021

According to the economic forecast of the Ministry of Finance, the bottom of the crisis has been overcome and economic recovery can be expected from next year.

The economic impact of the COVID-19 outbreak in Estonia and Northern Europe will be smaller than the EU average. The impact of the crisis has been very unevenly distributed between different sectors of the Estonian economy.

More information:

Photo by Markus Spiske on Unsplash

COVID-19 footprint in small countries

The COVID-19 footprint in small countries is of strong influence.
The information technology and communication sector was the least hit by the first wave of the coronavirus in spring, while accommodation providers, caterers and travel agents found themselves in the most difficult situation.
During the wintertime now, Estonia is entering the second wave in a vulnerable position. The most suffering sectors are responsible for 14 percent of the added value and employ every fifth worker in Estonia.

More information:

Photo by CDC on Unsplash

2050: Climate neutral Europe

At the end of last year, the European Commission introduced the “European Green Deal” which represents a set of policy initiatives with the common aim of making Europe climate neutral in 2050. Ursula vod der Leyen, President of the European Commission stated that: “The European Green Deal is our new growth strategy. It will help us cut emissions while creating jobs.” The Commission will propose a European Climate Law which will bring new legislation on the circular economy, farming, resource-efficient building or biodiversity. The European Commission plans to invest in all sectors of economy to reach its ambitious goal to transform the EU from a high- to low-carbon economy. In September 2020 the EC launched a €1 billion call for research and innovation projects that respond to the climate crisis and help protect Europe’s unique ecosystems and biodiversity.

For more information visit:

Photo: Guy Bowden, unsplash

Oeconomia, the film

The creation of money and debts: The filmmaker Carmen Losmann asks the grandees of the financial world naive questions, questions that do hit the heart of our economic system: How does money come into the world? Who takes over the debts? Does an economy only grow when credits grow? Is profit only possible when people, companies or the state get into debt? Who collapses first, our ecosystem earth or capitalism? In the film, fundamental economic interrelationships are vividly presented and confirmed by prominent bankers. Citizens also have their say, who trace these connections and ask critical questions. An instructive film, which is not an educational film after all, often makes you smile – and makes you want to deal with these questions further.

Co-production of the German speaking public TV stations ZDF and 3sat, shown at the Berlinale 2020.

The film is in German with English subtitles and vice versa.

Photo: City of London, Wikimedia commons

Education for Participation

The university professor for Economic Sociology and Social Science Education, Reinhold Hedtke, discusses convictions on citizen’s participation and the civic education required for it. Among others, he takes the increasing social inequality into consideration which is probably linked to depolitisation and abstention. The „systemic tensions between democratic participation and capitalism“ are therefore also ‘on the table’. What about his consequences regarding education for participation? See the full article. Below you find the abstract.

The paper presents a critical review of key tenets of mainstream educational thinking on participation. Many approaches to education for participation tend to fall short of the state of the art of social science research on participation. Therefore, the paper calls for educational and subject didactic approaches to consider the diversity and irreconcilability of theories of participation and of models of citizenship. It aims to curb participatory enthusiasm by taking into account crucial empirical findings on the disappointing effects of increasing participation. Persistent and increasing economic and political inequality and tendencies of depoliticisation turn out to be among the main obstacles to delivering on the promise of equal opportunities for democratic participation. This brings the systemic tensions between democratic participation and capitalism to the force. Against this sceptical assessment of participation theory and the reality of political participation, the challenges, possibilities and tasks of subject didactics in the social science domain are discussed. Above all, they face a fundamental decision: to subscribe to the idea of a functionalist education for participation as a kind of social engineering via schools, or to foster critical and political thinking about participation with the aim of changing prevailing power relations in favour of the less powerful and the powerless.

Photo by Tim Mossholder on Unsplash

Polish Health System is getting better …

… but still Poland is lagging behind.

Experts from the OECD and the Observatory prepared a set of 30 Country Health Profiles, covering all EU Member States, as well as Iceland and Norway.1 Since 2000, life expectancy at birth has increased by four years in Poland, but remains three years below the EU average. According to the Report State of Health in the EU 2019, the Polish population has one of the lowest life expectancies in Europe. It is just 77.8 years comparing to the EU average of 80.9 years. No surprisingly that fewer Poles report being in good health compared to other EU countries. In 2017, only of 59 % Polish population reported perceiving themselves to be in good health, compared with two thirds for the EU as a whole.

A weak effectiveness of health system is one of many reasons for it. Poland’s health system is mainly based on the state Social Health Insurance with the Ministry of Health and local governments supervising health care services. There are some private hospitals, but their share of patients beds was just 5% in 2015. Although private hospitals tend to be more effective than public ones, their profitability depends deeply on public contracts.2 Unfortunately the public share of health care spending in Poland, both as a share of GDP and in per capita terms, is one of the lowest in Europe. This low level of funding is insufficient to provide timely access to high-quality care, particularly given rising health care needs due to population aging. In consequence the level of unmet medical care needs in Poland is higher than the EU average, as Poland faces an acute shortage of health professionals.

Photo by Camilo Jimenez on Unsplash

1 More information at:

2 More information at:

Taxes and the road to recovery

Either politicians have the courage to redistribute wealth or major conflicts are imminent. Either way, you can sometimes hear it when it comes to question who pays for the Corona pandemic and how should an economy’s recovery be done. What do economists say?

Alfie Stirling and Sarah Arnold from the New Economics Foundation explain the situation for the UK and discuss when taxes should be raised or cut. Sure is, “.. the government should not be raising taxes during a crisis. More than anything, the economy needs money in people’s pockets — especially the very poorest, who most need the cash and are most likely to spend it.” They argue against austerity which includes higher VAT and cuts. On the contrary, the best way were government investments: “A far better way to boost demand now would be direct investment by government. This could come in the form of boosting public services by increasing both pay and the number of jobs for key workers, as well as by investing in much needed green and social infrastructure — such as home insulation and electrified transport — and social housing.”

Photo by The New York Public Library on Unsplash

Corona Bonds: Yes or No?

During the Corona pandemic comes an idea ‘on the table’ again: Euro bonds. With modifications, it is currently discussed as Corona bonds. What is the idea behind? Which arguments may convince to introduce this type of common bonds? What do scientists say and who rejects Corona bonds?

“Corona bonds are feasible and important to preserve the European project. We set out a number of principles that might serve as a blueprint for the European institutions. Importantly, Corona bonds could be issued through a new public law entity and include all the safeguards required for the protection of the fundamental values of the EU.”

This is said by authors of the Leibniz Information Center for Economics who published the paper “The case for Corona bonds“.

Pierino Postacchini, on the contrary, says in his article from 16/04/2020 “Corona Bonds are not the Solution. We need faster Measures that only the ECB can Implement”. They should be implemented after the virus crisis. Read his thoughts on Brave New Europe.

However, even authors from a think-tank which is known as being more conservative argue pro Corona bonds, see the article “European instruments against the Corona crisis incomparison“.

Corona bonds are mainly rejected by the German government. Andreas Becker explains in his article “Coronabonds and the idea of European financial unity” aspects of this old EU dispute on financial solidarity.