Oil prices not to blame

It was a good excuse, handy to explain Greece’s persistently higher inflation compared to the eurozone and European Union averages. No longer. Rising oil prices inevitably seep into the economy, affecting the prices of many products. Greece’s heavy dependence on oil imports, so went the excuse, made it uniquely vulnerable to oil-driven inflation. The latest European Commission report proves that fast-rising oil prices have not greatly affected inflation in Europe, where, with a couple of exceptions, countries are as dependent as Greece on imports. Indeed, oil prices, as well as the prices of other raw materials, gained significantly this year. In the beginning of August, oil reached an all-time high of $80 per barrel, but then dropped, due to perceived lower global geopolitical risks. Even now, however, oil futures point to a $73 barrel of oil for end-2006, significantly higher than previous forecasts. Despite these developments, economic activity in Europe is accelerating, says the Commission, revising upward its GDP growth estimates. Prices, measured by the European Central Bank’s Harmonized Index of Consumer Prices (HICP) rose at a rate of just over 2 percent, because of the effect of oil and natural gas prices. Core inflation, which excludes the volatile fuel and fruit and vegetables prices stood at just 1.6 percent. The small difference between headline and core inflation, less than 0.7 percent, is a sign that the rise in oil prices did not have a big effect on the European economy as a whole. Although industrial producer prices gained, these gains were not passed on to consumers because of «strong competition.» Inflationary expectations, although initially accelerating, were brought under control, the Commission says, describing a phenomenon observed in many countries, but usually not in Greece. Moderate wage hikes How was this achieved? «Low pay rises and recent productivity gains helped unit labor costs remain low,» says the Commission. Secondary effects from oil price rises did not appear. In other words, the existence of competition prevents price hikes, while moderate price rises and higher productivity contain cost rises. Even when there is pressure from wholesale prices, it does not translate into higher consumer prices. Much of Greece’s public opinion has been duped into thinking that the majority of Europeans are workplace-bound slaves when they are not unemployed. We should think again. Unemployment in the eurozone, averaging 7.8 percent of the workforce is lower than in Greece and, besides, it was lowered significantly last year.