Inflation and competitiveness divergences in the euro area countries

Daniela Filip, Daphne Momferatou and Ralph Setzer

Economic Bulletin Boxes, 2023, vol. 4

Abstract: The box provides an analysis of the recent increase in inflation differentials in the euro area countries and its impact on price competitiveness. To a certain extent, inflation differentials are normal in a currency union, insofar as they reflect temporary adjustments to shocks or are associated with catching-up processes. However, in other cases, inflation differentials may reflect persistent diverging cost developments, possibly related to a spillover of energy and/or food price shocks into labour cost differentials, or structural challenges such as nominal and real rigidities in product and labour markets. In such cases, inflation differentials may cause significant shifts in price competitiveness that need to be addressed by structural policies and/or countercyclical fiscal policy. Several euro area countries with legacy external imbalances have improved their price competitiveness in recent years when compared with the pre-pandemic period, while others have recorded considerable losses in price competitiveness. JEL Classification: E31, F32, J31

Keywords: competitiveness; external imbalances; Inflation (search for similar items in EconPapers)
Date: 2023-06
Note: 471525
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