PRESS RELEASE

Inflation differentials in the euro area: potential causes and policy implications

30 September 2003

The European Central Bank (ECB) is today publishing a report entitled "Inflation differentials in the euro area: potential causes and policy implications" prepared by the Monetary Policy Committee of the European System of Central Banks, which comprises experts from the ECB and the national central banks.

The report analyses the size and origins of inflation differentials in the euro area since the start of Stage Three of Economic and Monetary Union and the related policy implications. Various indicators suggest that the extent of inflation dispersion in the euro area is not notably different from that in the United States. However, in contrast to regional inflation differentials observed within the United States and individual euro area countries, most countries within the euro area have experienced relatively persistent inflation differentials since 1999.

The report stresses that current inflation differentials are best explained by a combination of primarily non-structural factors, such as differences in profit margin and unit labour cost developments, in administered price and indirect tax changes, as well as in cyclical positions. In addition, some mainly structural factors, such as the impact of nominal convergence effects triggered by EMU, structural rigidities and, to a limited extent, income convergence and Balassa-Samuelson effects may have also contributed to the observed inflation differentials and their persistence. In this context, the report states that the inception of EMU implied a regime shift in monetary policy, the nominal convergence effects of which have affected the euro area countries differently and may take several years to unfold. It therefore appears still to be too early to make a final assessment of the normal inflation differentials to be expected in the euro area.

The report emphasises that the single monetary policy of the ECB can only be geared towards the objective of price stability in the euro area as a whole. However, evidence suggests that inflation differentials in the past few years have been large and persistent enough to justify national remedies in some countries to prevent undue losses in competitiveness. As the single monetary policy stance, from a national perspective, is given, the report points out that national economic policies need to be adjusted to counteract such persistent and potentially damaging inflation differentials.

The report will be available on the ECB's website under the "Publications" section. Hard copies of the report can be obtained from the ECB's Press and Information Division.

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