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May 22, 2022

Politicians, COVID and corporations’ greed dominate households inflation narrative

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

Romanian yearly inflation surged in December 2021 to 8.19% the highest value since 2005. But Romania is not alone, with Poland showing an annual inflation of 8.6%, United States 7%, and Germany 5.3%. While in Europe, the main driver for inflation is the steep increase in natural gas prices, in the US the main driver is the increase in gasoline prices. A recent survey in the United States is showing that when it comes to causes for these surge in prices experts and households are having different views. While experts are trying to put data into economic theories, households are putting the inflation effects into stories blaming the Government, COVID and companies.

In Romania, the December 2021 data shows a yearly increase in prices of 6.69% for food, 10.73% for goods and 4.49% for services. But these figures are not telling the whole story. In one year the natural gas prices rose by more than 51%, while the fuel prices rose with 22.4%.  The electricity price rose by almost 15% and the heating by 14%. On the food side, cooking oil is the year’s champion in price increase with 27.17%, closely followed by potatoes with almost 25%, corn flour with 15%, sugar and margarine with almost 12%. The bread prices increased by 10%. A lot of people are blaming the pandemic, politicians, government and companies for this situation. But this narrative is not singular to Romania.

In the United States the inflation rose in 2021 to 7%, the largest value in 40 years. Gasoline prices increased almost 50%, energy prices almost 30% and natural gas close to 25%. Used cars prices increased more than 37% and new cars 11%. Food prices increased by 6.3%.

These are figures that worry governments and experts, but also the households and companies. However, a recent paper about inflation narratives written by a group of German and Danish academics is showing that explanations for inflation are very diverse from experts to laymen. The researchers surveyed, in November 2021, 1,029 respondents from the United States, a representative sample of the U.S. population in terms of gender, age, region and total household income and 163 company managers. The authors also surveyed 104 experts out of which 55% are based in the U.S., most being professors or researchers at renowned U.S. institutions.

Experts consider inflation generated by supply issues and pent-up demand factors, cheap money and government stimulus, among others. For example, one expert considers that “supply chain issues are probably the most important factor. Pent up demand from the pandemic, combined with historically high household savings/wealth, which has made consumers less price-sensitive, is probably the second most important factor.”

While experts are trying to put the figures into economic theories, the narrative in the household and company managers area is more simple. “The fact the government handed ’free’ money like it was candy, we are all now paying for that free money they gave us,” is one answer. Other responses among households focus more on supply-side issues, “ there are shortages not only in product but in producing and delivering”. According to the survey, many households use narratives that are absent in economics textbooks but have been prevalent in the media: households frequently mention the pandemic (15.5%), mismanagement by the government (24.1%), or corporations trying to increase their profits (8%). Almost none of the experts provide these narratives.

How will US inflation unfold over the next 12 months?  According to the survey, experts predict an inflation rate of 3.7%, compared to 4.1% among managers and 4.7% among households. Over the next 5 years after the survey, experts predict an inflation rate of 2.6%, while managers and households expect inflation rates of 3.4% and 3.9%, respectively. This shows that households, firm managers, and experts expect inflation to revert back to lower levels in the future. However, while experts believe that inflation in five years will only be somewhat higher than the Fed’s target of 2 percent, households and managers expect inflation to be persistently higher.


Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

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