Inflation divergence in the euro area : nature and implications : monetary dialogue papers : November 2022.
Date: 2023-04-21
Institutions: Directorate-General for Internal Policies of the Union
Subjects: euro area, food price, inflation, monetary policy, price of energy

IN DEPTH ANALYSIS
Requested by the ECON Committee 

Monetary Dialogue Papers, November 2022 

Inflation divergence 
in the euro area: 
nature and 
implications 

Policy Department for Economic, Scientific and Quality of Life Policies  
Directorate-General for Internal Policies 
Authors: Klaus-Jürgen GERN, Nils SONNENBERG, Ulrich STOLZENBURG 
PE 733.996 - November 2022 

EN 

 
 
Inflation divergence 
in the euro area: 
nature and 
implications 

Monetary Dialogue Papers  
November 2022 

Abstract 

Not only  has  inflation  in  the  euro  area  accelerated to  historical 
levels in 2022, but also the dispersion of inflation across Member 
States  has  risen  strongly.  We  investigate  the  nature  of  this 
dispersion  and  find  that  it  is  driven  by  energy  and  food  prices, 
whereas  differences  in  core  inflation  are  not  unusually  high, 
except for the Baltic countries. While large differences in inflation 
can lead to an undesirable divergence in growth trajectories, this 
cannot  be  addressed  by  the  common  monetary  policy  which 
should strictly focus on price stability in the euro area as a whole.  

This paper was provided by the Policy Department for Economic, 
Scientific  and  Quality  of  Life  Policies  at  the  request  of  the 
Committee on Economic and Monetary Affairs (ECON) ahead of 
the Monetary Dialogue with the ECB President on 28 November 
2022. 

This document was requested by the European Parliament's Committee on Economic and Monetary 
Affairs (ECON). 

AUTHORS 
Klaus-Jürgen Gern, Kiel Institute for the World Economy. 
Nils Sonnenberg, Kiel Institute for the World Economy. 
Ulrich Stolzenburg, Kiel Institute for the World Economy. 

ADMINISTRATOR RESPONSIBLE  
Drazen RAKIC 

EDITORIAL ASSISTANT  
Catherine NAAS 

LINGUISTIC VERSIONS 
Original: EN 

ABOUT THE EDITOR 
Policy  departments  provide  in-house  and  external  expertise  to  support  European  Parliament 
committees and other parliamentary bodies in shaping legislation and exercising democratic scrutiny 
over EU internal policies. 

To contact the Policy Department or to subscribe for email alert updates, please write to: 
Policy Department for Economic, Scientific and Quality of Life Policies 
European Parliament 
L-2929 - Luxembourg 
Email: Poldep-Economy-Science@ep.europa.eu  

Manuscript completed: 10 November 2022 
Date of publication: November 2022 
© European Union, 2022 

This document was prepared as part of a series on “Inflation differentials: consequences for monetary 
policy”, available on the internet at: 
https://www.europarl.europa.eu/committees/en/econ/econ-policies/monetary-dialogue  

Follow the Monetary Expert Panel on Twitter: @EP_Monetary 

DISCLAIMER AND COPYRIGHT 
The  opinions  expressed  in  this  document  are  the  sole  responsibility  of  the  authors  and  do  not 
necessarily represent the official position of the European Parliament.  

Reproduction  and  translation  for  non-commercial  purposes  are  authorised,  provided  the  source  is 
acknowledged and the European Parliament is given prior notice and sent a copy. 

For  citation  purposes,  the  publication  should  be  referenced  as:  Gern,  K.-J.,  N.  Sonnenberg,  and  U. 
Stolzenburg  (2022).  Inflation  divergence  in  the  euro  area:  nature  and  implications,  publication  for  the 
Committee on Economic and Monetary Affairs, Policy Department for Economic, Scientific and Quality 
of Life Policies, European Parliament, Luxembourg, 2022.

 
 
 
 
 
 
 
 
 
 
Inflation divergence in the euro area: nature and implications 

CONTENTS 

LIST OF ABBREVIATIONS 

LIST OF BOXES 

LIST OF FIGURES 

EXECUTIVE SUMMARY 

INTRODUCTION 

CURRENT INFLATION DIVERGENCES IN PERSPECTIVE 

2.1. 

2.2. 

Inflation dispersion based on major product categories 

Inflation divergences based on disaggregated approach 

POTENTIAL PROBLEMS WITH INFLATION DIFFERENTIALS 

CONCLUSION AND POLICY IMPLICATIONS 

REFERENCES 

ANNEX 

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LIST OF ABBREVIATIONS  

ECB 

EU 

GDP 

HICP 

TPI 

European Central Bank 

European Union 

Gross domestic product 

Harmonised index of consumer prices 

Transmission Protection Instrument 

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Inflation divergence in the euro area: nature and implications 

LIST OF BOXES 

Box 1:  

The Balassa-Samuelson theorem: benign inflation differentials? 

LIST OF FIGURES 

Figure 1:  

Inflation rates in the euro area from January 2021 to October 2022 

Figure 2:   Dispersion in headline and core inflation rates 

Figure 3:   Dispersion in energy inflation 

Figure 4:   Dispersion in food inflation 

Figure 5:   Distribution of sub-group inflation rates in the euro area 

Figure 6:   Dispersion in the distributional statistics of sub-group inflation rates 

Figure 7:   Government bond yields (10-year) 

Figure 8:   GDP deflator in selected Member States 

Figure 9:  

Service and goods inflation in the euro area 

Figure 10:   Energy inflation 

Figure 11:   Food inflation 

Figure 12:   Distribution of sub-group inflation rates for 12 initial euro area countries 

Figure 13:   Distribution of sub-group inflation rates for newer euro area countries 

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EXECUTIVE SUMMARY 

•  Headline inflation differentials among euro area Member States are currently at the highest 
level ever  since  the  start  of  the  monetary  union, mostly  driven by  energy  price  increases. 
Energy subcomponents like fuels, gas and electricity also diverge strongly due to differences in the 
energy  mix  but  also  the  characteristics  of household  utility  contracts  and  regulations,  including 
government  interventions  to  dampen  price  increases  at  the  consumer  level.  Hence  the  historic 
energy crisis affects Member States differently. The different energy price dynamics also feed into 
diverging food price inflation. 

•  Core  inflation,  by  contrast,  does  not  yet  signal  a  concerning  level  of  divergence,  with  the 
exception  of  the  Baltic  countries.  While  measures  of  dispersion  of  core  inflation  are  also 
historically high among all Member States, the level of dispersion is not unusually elevated when 
the Baltics are excluded. This finding is confirmed by the analysis of price developments of around 
100 HICP subindices, as only the Baltics show a significant shift of the distribution of sub-group 
inflation rates. 

• 

Inflation divergences under a single monetary policy can be problematic. Increased inflation 
dispersion  can  inhibit  the  smooth  functioning of  the  currency  union  if  inflation  differentials  are 
significant and persistent. Relatively high inflation may lead to the perception of relatively low real 
interest rates, potentially fuelling a spiral of rising prices, wages and activity, whereas conversely in 
low inflation parts of the currency union higher real interest rates can endanger fiscal sustainability 
and potentially depress the economy. At the current juncture, it is too early to say that the recent 
inflation dispersion will lead to similar self-reinforcing growth differentials in the euro area as have 
been experienced before and after the Financial Crisis.  

•  The  ECB  must  safeguard  price  stability  for  the  euro  area  as  a  whole,  not  for  every  single 
Member State. It is not the task of the single monetary policy to fine-tune the business cycle in 
each  Member  State.  The  ECB  does  not  have  the  tools  to  create  identical  real  interest  rates  and 
financing conditions, or to prevent real exchange rate imbalances from building up. The focus of a 
single monetary policy must be the euro area aggregate. 

•  Diverging trends in inflation have to be kept in check by national policymakers and market 
forces.  It  is  the  responsibility  of  national  economic  policy  to  counteract  potentially  harmful 
macroeconomic  developments  at  the  country  level,  e.g.  by  discouraging  a  domestic  credit-
financed  boom  by  means  of  regulation  or  fiscal  policy.  And  if  divergent  inflationary  dynamics 
persist, the resulting real exchange rate developments will eventually activate market forces that 
contribute to resolving these imbalances. 

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Inflation divergence in the euro area: nature and implications 

INTRODUCTION 

Inflation  rates  in all  euro  area  countries increased  steadily since  early  2021  and  are  currently 
extremely high by historical standards. The highest inflation rates are currently recorded in the three 
Baltic countries at over 20%, followed by rates of around 15% in the Netherlands and Slovakia (Figure 
1). Elsewhere in the euro area, headline inflation is generally close to 10%, only Finland, France and 
Malta have registered significantly lower inflation over recent months, but still significantly above the 
inflation target.  

The  inflation  surge  has  different  origins,  but  the  effects  have  accumulated  since  early  2021. 
During the first phase of the post-pandemic reopening of the economy, supply-chain problems and 
material shortages stood in the spotlight of public discussion. The rapid recovery of demand for goods 
combined with supply-side problems eventually led to surging prices along the supply chain. European 
gas prices already increased strongly in the second half of 2021 reflecting concerns about supplies amid 
unusually flows from Russia during the summer, while oil prices also contributed to inflation. Energy 
inflation depends on the energy mix of the respective countries, on introduced price regulations and 
the institutional setting of household utility contracts.1 Another factor behind the surge in inflation is 
the creation of purchasing power through the fiscal-monetary policy mix applied during the pandemic. 
In contrast to previous periods, the fiscal deficits during the pandemic were larger and totally absorbed 
by central bank asset purchases. Monetary aggregates increased heavily and are closely related to the 
extra savings, which accumulated during the pandemic. The coincidence of purchasing power on the 
one hand and negative supply shocks on the other hand, which led to lower production capabilities, 
constitutes another reason for the – worldwide – surge of inflation (Kooths, 2022). 

Inflation  differentials  across  euro  area  Member  States  are  at  record  levels.  A  large  part  of  the 
dispersion of core inflation, i.e. inflation excluding energy, food, tobacco and alcohol, however, seem 
to be mostly driven by the three Baltic countries and Slovakia (Figure 1), where core rates are above 
8%. For the rest of the euro area, core rates are considerably lower at approximately 4%. While recently 
the  Netherlands,  Greece, Cyprus,  Portugal,  Slovenia,  Malta  and  Slovakia hit  the  6%  threshold.  While 
there is huge divergence among the core rates of euro area countries they all reached a historic level 
and are way above the inflation target of the ECB. 

The consequences of wider inflation differentials are unclear. Differences in inflation can to some 
extent  be  justified  by  catching-up  processes.  If  there  are  larger  deviations,  however,  and  if  these 
deviations accumulate, this can lead to excessive changes in real exchange rates within the currency 
union and lead to more asynchronous business cycles between Member States, thus complicating the 
conduct of monetary policy. The recent wave of inflation and inflation differentials is closely linked to 
the surge in energy prices and may be short-lived (or even reversed) if energy prices stabilise (or decline 
to  more  moderate  levels).  In  any  case,  the  question  arises:  what  is  the  nature  of  recent  inflation 
differentials, whether they will persist, and if there is need for the ECB to respond to them. 

1  

The  German  council  of  economic  experts  has  compiled  a  list  of  the  interventions  in  European  countries,  although  their  degree  and 
intensity is hard to measure (Sachverständigenrat, 2022, p.127). 

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Figure 1: Inflation rates in the euro area from January 2021 to October 2022 

a) Headline Inflation 

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Source:   Refinitiv, Eurostat. 

Notes:   Monthly headline and core inflation rates from January 2021 to October 2022. Core rate here is defined as overall 
inflation excluding energy, food, tobacco and alcohol. October data for core rates was available for Belgium, Cyprus, 
Finland, France, Germany, Greece, Italy, Malta Netherlands and Slovakia.  

This  paper  is  organised  as  follows:  Section  2  analyses  descriptively  the  sources  of  inflation 
divergences in the euro area, digging into harmonised index of consumer prices (HICP) subcategories 
and comparing different groups of Member States. Section 3 explains how inflation divergences can 
inhibit a smooth functioning of the euro area economy. Section 4 concludes with a discussion of the 
possible consequences for monetary policy and national economic policies. 

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Inflation divergence in the euro area: nature and implications 

  CURRENT INFLATION DIVERGENCES IN PERSPECTIVE 

This  chapter  puts  the  current  inflation  divergences  into  perspective  using  different  levels  of 
disaggregation. The first part investigates differences in price developments at the level of headline, 
core,  food  and  energy  inflation  as  well  as  the  categories  services  and  non-energy  industrial  goods. 
Energy is further disaggregated into fuels, gas and electricity price inflation. The second part of the 
analysis is based on around 100 comparable price series focusing on the shifts in the distribution of 
sub-group inflation rates in the euro area countries. 

For the analyses two statistical measures are reported. The first measure is the standard deviation 
of the 19 year-over-year inflation rates for every month since the beginning of the currency union. This 
measure  gives  the  average  percentage  point  deviation  around  the  average  inflation  rate  of  the  19 
countries (#19). The average inflation rate can be seen as a common trend among the 19 countries. The 
more  dispersed  the  inflation  rates  are,  the  higher  will  be  the  standard  deviation.  A  high  degree  of 
dispersion of inflation rates can constitute a problem for a single monetary policy, which only applies 
its  policy  instruments  (esp.  interest  rates)  to  the  whole  euro  area  targeting  aggregate  euro  area 
inflation.  This  measure  is  also  calculated  for  two  other  country  aggregates:  one  consisting  of  16 
countries,  where  the  three  Baltic  countries  (Estonia,  Lithuania,  Latvia)  are  excluded  (#16),  which 
currently stand out in terms of inflation, and one with only the 12 initial countries of the currency area 
(#12)2. The second measure is the average percentage point absolute deviation from the underlying 
euro area inflation. In comparison to the first measure, the country size is taken into account, as the 19 
countries receive corresponding weights in the calculation of the euro area inflation aggregate. Hence, 
the  reference  is  not  an  equally-weighted  average  inflation  rate  of  the  19  Member  States,  but  the 
weighted  average  of  the  19  inflation  rates  using  Eurostat  country  weights.  This  measure  is  also 
calculated for the other two country aggregates (#16, #12). Differences over time of the two statistical 
measures  are  limited,  so  the  corresponding  figures of  the  second  measure  are  only  reported  in  the 
appendix.  

Inflation dispersion based on major product categories 

2.1. 
Currently the dispersion in headline inflation rates stands at its highest ever level since the start 
of the monetary union. The headline inflation differentials are more pronounced for the 19-Member 
States  than  for  the  other  two  country  aggregates  (#16,  #12),  reflecting  the fact  that  the  three Baltic 
states  are  recently  inflating  considerably  more  than  any  other  country  (Figure  1,  Figure  2a).  This 
occurred  in  similar  fashion  before  the  great  financial  crisis  (Figure  2a).  Although  significantly  lower, 
inflation dispersion is also at record levels for the 12 country and the 16 country aggregates. Currently, 
the difference between the two country aggregates is small, whereas the dispersion in the 16 country 
aggregate was substantially larger than in the initial-12 in the early years of the currency union, when 
the four countries were outside the euro and even outside the European Union (EU).  

2   11 initial Member States from 1999: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and 
Spain, plus Greece which joined in 2001 before the currency was introduced. The following countries joined the currency area in a later 
stage: Cyprus (2008), Estonia (2011), Latvia (2014), Lithuania (2015), Malta (2008), Slovakia (2009) and Slovenia (2007). 

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Figure 2: Dispersion in headline and core inflation rates 

a) Headline Inflation: Standard Deviation 

b) Core Inflation: Standard Deviation 

#19

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c) Service Inflation: Standard Deviation 

d) Goods Inflation (NEIG): Standard Deviation 

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Source:   Refinitiv, Eurostat. 

Notes:   Standard deviation of 19, 16 and 12 inflation rates respectively. Country aggregate #19 based on all countries of the 
euro area. Country aggregate #16 excludes the three Baltic countries. Country aggregate #12 is based on 12 initial 
euro area countries. Core rate is overall inflation excluding energy, food, tobacco and alcohol.     

Core  inflation  dispersion  is  not  exceptionally  high  for  the  majority  of  Member  States  of  the 
currency area. The overall dispersion measure (#19) has spiked in recent months and is currently close 
to the peak experienced in the runup to the Great Recession. Again, the dispersion level is clearly driven 
by the three Baltic countries, which experience way higher core inflation rates than the rest of the euro 
area countries. The #12 aggregate shows that core inflation differentials in the initial Member States of 
the euro area are currently even within the normal range experienced over the past 20 years (Figure 
2b, Figure 1b).  

The divergence in core rates seems to be particularly driven by differences in services inflation. 
Dissecting the inflationary developments further, we look at dispersion in services inflation, which is at 
an elevated level with respect to its historical behaviour (Figure 2c, Figure 9 appendix). Again, services 
inflation is higher in the newer Members of the currency union and particularly in the Baltic countries, 
while for the 12 country aggregate the dispersion is less pronounced. Note that before and after the 
Great Recession, these countries have already shown large swings in services price inflation. Differences 
in services inflation can, in part, be caused by indirect effects of energy prices (pass-through), but wage 
dynamics  should  be  particularly  important  as  labour  costs  represent  a  large  share  of  services 
production  costs.  Different  wage  dynamics  will  thus  also  be  a  prominent  driver  of  core  inflation 
divergences going forward. 

Inflation differentials for non-energy industrial goods are overall relatively high, but only due to 
high inflation in the Baltics and still in line with former peaks. Non-energy industrial goods inflation 
has  also  risen  for  the  19-country  group,  but  so  far  it  is  not  higher  than  in  previous  phases  of  rising 
inflation. Strikingly, the increase of dispersion is entirely due to inflation in the Baltic countries as the 

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Inflation divergence in the euro area: nature and implications 

standard  deviation  is  even  comparatively  low  by  historical  standards  for  the  16-  and  12-  country 
aggregates (Figure 2d, Figure 9 appendix). 

The biggest driver of headline inflation divergences is the energy component. Never before have 
there been energy price differentials of this magnitude in the euro area (Figure 3a, Figure 10 appendix). 
This holds true for all country aggregates, i.e. there are huge differences in energy inflation also among 
the initial Member States. These huge differences can be explained mostly by the gas and electricity 
components,  but  even  fuel  prices  diverge  strongly  and  at  a  level  never  seen  before.  Apart  from 
transportation costs, fuel price increases should be relatively homogeneous among the Member States 
in a single market, but regulations and differences in the petrol-diesel usage might be drivers of this 
heterogeneity.  

Figure 3: Dispersion in energy inflation 

a) Energy Inflation: Standard Deviation 

b) Fuels Inflation: Standard Deviation 

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c) Gas Inflation: Standard Deviation 

d) Electricity Inflation: Standard Deviation 

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Source:   Refinitiv, Eurostat. 

Notes:   Standard deviation of 19, 16 and 12 inflation rates respectively. Country aggregate #19 based on all countries of the 
euro area. Country aggregate #16 excludes the three Baltic countries. Country aggregate #12 includes 12 initial euro 
area countries. 

Institutional settings, the energy and heating mix and different intensity of price regulations lie 
at the heart of the differences in the evolution of electricity and gas prices. In Germany, a high 
prevalence of long-term contracts of households and small firms for gas and electricity and a relatively 
large market share of risk-averse utility companies, which hedge their procurement costs on the futures 
market, have led to subdued price increases (Sonnenberg, 2022). By contrast, in the Netherlands and 
Greece, gas prices increased dramatically recently and are pushing headline inflation figures upwards3. 
Regarding electricity, there were recently also huge increases in the Netherlands and Italy4.   

3

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In October 2022, the year-on-year increase of the gas component in the HICP is 229% in the Netherlands and 294% in Greece. 
The increase of the electricity component in October is 188% in the Netherlands and 103% in Italy. 

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Once energy prices have stabilised, these drivers of dispersion should vanish. In some countries, 
the  pass-through  from  higher  electricity  and  gas  prices  is  faster,  while  e.g.  in  Germany  prices  are 
increasing rather slowly. Nevertheless, in the end all countries face comparable costs regarding their 
energy inputs. The energy mix and the specific merit order to meet the demand then determines the 
cost increases. An energy mix where gas plants are needed relatively often to meet electricity demand 
will consequently end up with higher retail prices for households and companies. Future market prices 
decreased since their peaks in August, but are still relatively high compared to their 2005-2020 average 
values. For Germany, these futures prices still suggest a tenfold increase (Jannsen and Sonnenberg, 
2022), which has so far been only partly passed on to retail customers.  Eventually, in countries where 
the energy mix is heavily dependent on gas, the terms of trade effect and related loss in prosperity will 
probably be higher. 

Figure 4: Dispersion in food inflation 

a) Unprocessed Food Inflation: Standard Deviation 

b) Processed Food Inflation: Standard Deviation 

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Source:   Refinitiv, Eurostat. 

Notes:   Standard deviation of 19, 16 and 12 inflation rates respectively. Country aggregate #19 based on all countries of the 
euro area. Country aggregate #16 excludes the three Baltic countries. Country aggregate #12 includes 12 initial euro 
area countries. 

Food price inflation differentials are currently also at a record level. Inflation differentials are high 
for both food subcategories (unprocessed food and processed food), but the dispersion is higher for 
processed food (Figure 4, Figure 11 appendix). This is probably related to the amount of energy used 
in  the  production  process.  The  standard  deviation  at  the  level  of  19  countries  is  once  again  visibly 
influenced by the dynamics in the Baltic countries, but the level for the other two country aggregates 
is also historically high (Figure 4). This effect might also be temporary in the sense that energy prices 
will be passed-through fully to consumers in all countries at some point.  

Inflation divergences based on disaggregated approach 

2.2. 
The  disaggregated  approach  is  based  on  some  100  subcomponents  of  the  HICP  and  gives  an 
insight  into  the  broadness  of  price  increases.  For  about  100  HICP  price  subindices  distributional 
statistical  measures  provide  information  about  the  broadness  of  inflation.  In  contrast  to  the  overall 
HICP and its categories – like services inflation or core inflation – the individual category time series are 
not aggregated using a weighting scheme, but are simply ranked by their monthly price increase. Then 
the 10, 25, 50, 75 and 90% quantiles are calculated5. The 50% quantile (median) indicates the inflation 

5 With 100 subindices, the 10% quantile is the price increase at the 10th rank, i.e. only 9 categories have lower price increases than this 

product group in the respective month, and approx. 90 categories experience higher price increases than this product group. 

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Inflation divergence in the euro area: nature and implications 

rate of the category that parts the 100 prices increases into two halves. The median rate like core rates 
can be seen as a gauge of the underlying inflation dynamics6 (Sonnenberg and Stolzenburg, 2022). 

Since 2021, the distribution of sub-group inflation rates for the euro area has shifted upwards, 
and  the  inflation  process  is  becoming  more  and  more  broad  based.  All  distributional  summary 
measures  lie  currently  at  record  levels  (Figure  5).  The  90%  quantile  is  influenced  heavily  by  energy 
prices,  but  also  the  other  measures  are  unusually  high.  For  example,  since  the  beginning  of  the 
currency  union  the  10%  quantile  (almost)  always  had  a  negative  value,  i.e.  there  was  a  sufficient 
number of categories with falling prices – today this quantile stands at a positive value of 1.1%. The 
25% quantile currently stands at 2.6% and hence above the inflation target of the ECB.  

Figure 5: Distribution of sub-group inflation rates in the euro area 

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2000

Median

10%

25%

75%

90%

2003

2006

2009

2012

2015

2018

2021

Source:   Refinitiv, Eurostat. 

Note:  

The graph shows quantiles of the distribution of sub-group inflation rates of CPI components at the 4-digit level (101 
subindices). 

In the past, big swings usually where shaped by the dynamics of crude oil prices. These big swings 
in a few oil-dependent subcategories can be seen by looking at the 10% and 90% quantile in the period 
around the Great Financial Crisis. With the booming world economy before the Great Recession, the oil 
price surged, reaching US dollar (USD) 140 per barrel of Brent in July 2008. A year before, it stood at 
USD 80 per barrel. In January 2009, the oil price stood at USD 40 per barrel. For fuel prices and heating 
oil the direct connection to crude oil prices is evident, but indirectly these dynamics spread to more 
categories.  

The distribution of sub-group inflation rates was fairly stable until 2007, but shifted downwards 
after the Great Recession and the subsequent European sovereign debt crisis. Before 2007, the 
corridor  between  the  10%  and  90%  quantiles lay on  average  between  -1%  and  4%.  The  tails of  the 
distribution experienced large swings after 2007 and during the Great Recession related to the volatility 
of oil prices. From 2015 to 2019 the corridor lay much lower, between -1% and 2.6% on average. Thus, 
particularly the higher quantiles (90%, 75%, 50%, 25%) shifted downwards. This effect also becomes 

6   A trimmed mean is another way, which is often used to measure the underlying inflation dynamic. For the trimmed mean the extreme 
price increases, i.e. especially high or low price increases, are not considered in the mean calculation. It is often having a similar trajectory 
as the median of all price increases (Sonnenberg and Stolzenburg, 2022). 

13 

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IPOL | Policy Department for Economic, Scientific and Quality of Life Policies 

obvious  from  inspecting  the  inflation  corridors  for  the  single  countries  of  the  euro  area  (Figure  12 
appendix). 

The distributions of sub-group inflation rates in Italy, Spain, Greece and Portugal shifted visibly 
downwards in the aftermath of the euro sovereign debt crisis. This crisis, where sovereign bond 
yields  escalated  and  growth  rates  decreased,  had  a  lasting  effect  on  the  price  dynamics  in  these 
countries  (Figure  12  appendix).  The  shift  in  these  countries  also  influenced  the  distribution  of  sub-
group  inflation  rates  of  the  euro  area  as  a  whole  (Figure  5)  as  the  share  of  these  countries  in  the 
calculation of the euro area HICP is significant at about one third, according to the weights used by 
Eurostat.  

The divergence in the quantiles of the distribution of sub-group inflation rates are currently at a 
high level. In line with the analysis above (chapter 2.1.), statistical measures like the standard deviation 
to describe the dispersion among the euro area countries can be calculated for all quantiles. Currently, 
the dispersion for a country aggregate including the Baltics is higher on all levels (quantiles). This is also 
indicated by the inflation corridors for the Baltics as they are the only ones that need a different vertical 
scale (Figure 13 appendix).  

The  median  as  an  indicator  for  the  underlying  inflation  dynamics  also  signals  elevated  price 
pressure in the Baltic countries. In line with the discussion of the behaviour of the core rates above 
(chapter 2.1.), the Baltic countries experience a much higher underlying inflation, so that the dispersion 
statistic for the country group including the Baltics stands out. But this is also true for the 75% and 90% 
quantiles (Figure 6, Figure 13 appendix). The dispersion for the 10% quantile is relatively low in historic 
comparison and there is also no big difference between the country aggregates (#19, #16, #12).  

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14 

 
 
 
 
Inflation divergence in the euro area: nature and implications 

Figure 6: Dispersion in the distributional statistics of sub-group inflation rates 

Median 

3

2

1

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

0
2000

10% Quantile 

4

3

2

1

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

#19

#16

#12

2003

2006

2009

2012

2015

2018

2021

#19

#16

#12

25% Quantile 

4

3

2

1

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

0
2000 2003 2006 2009 2012 2015 2018 2021

0
2000

2003

2006

2009

2012

2015

2018

2021

75% Quantile 

90% Quantile 

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

#12

#16

#19

7
6
5
4
3
2
1
0
2000 2003 2006 2009 2012 2015 2018 2021

10

8

6

4

2

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

0
2000

#19

#16

#12

2003

2006

2009

2012

2015

2018

2021

Source:   Refinitiv, Eurostat. 

Notes:   Standard  deviation  of  the  summary  distributional  measures  for  the  respective  19,  16  and  12  countries.  Country 
aggregate #19 based on all countries of the euro area. Country aggregate #16 excludes the three Baltic countries. 
Country aggregate #12 is based on 12 initial euro area countries. 

Overall, the effect from the Baltic countries on the distribution of sub-group inflation rates for 
the euro area as a whole is limited. The country weight of the Baltic countries sums up to about 1%, 
hence  the  effect  is  limited.  The  distribution  of  sub-group  inflation  rates  for  the  initial  12  euro  area 
countries is very similar to the euro area aggregate (Figure 5, Figure 12 appendix). A significantly higher 
distribution of subgroup inflation rates can only be observed in Slovakia and the Baltics. However, they 
have  experienced  a  higher  upward  and  downward  price  flexibility  also  in  the  past,  hence  these 
elevated inflation dynamics may prove to be temporary. But going forward there might result a bigger 
trade-off, if eventually wage dynamics based on past inflation surges set in or inflation expectations 
de-anchor contributing to a persistent divergence of price and wage setting behaviour in the Member 
States. 

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IPOL | Policy Department for Economic, Scientific and Quality of Life Policies 

  POTENTIAL PROBLEMS WITH INFLATION DIFFERENTIALS 

Inflation  divergences  under  a  single  currency  with  a  one-size-fits-all  monetary  policy  can  be 
problematic. Deviations in price developments between Member States are not a big concern if they 
are rather small and temporary. However, as soon as inflation differentials become relatively large and 
persistent, there is a case for counteracting potentially detrimental effects to the statics and the smooth 
functioning of the currency union. In this chapter, we present issues that may arise with deviations in 
price  developments  across  countries  –  concerning  an  uneven  transmission  of  monetary  policy, 
concerning public debt sustainability and real exchange-rate misalignments. 

With  substantial differences  in  nominal  interest  rates  or domestic inflation,  an  even transmission  of 
monetary policy to individual Member States is hard to achieve. Economic actors take investment and 
consumption decisions based on their expectations of real interest rates. If these differ to a large extent, 
either due to differences in nominal interest rates or in expected inflation, monetary policy instruments 
affect economic activity differently within the currency union. Inflation differentials can even be self-
reinforcing,  when  high  inflation  in  a  Member  State  leads  economic  actors  to  build  above-average 
inflation expectations, so that perceived real interest rates are lower than in the euro area average. As 
a result, investment and consumption is stimulated additionally, raising domestic demand even further 
and fuelling inflation. Conversely, below-average inflation dynamics can also be self-reinforcing, when 
perceived real interest rates are relatively high, and domestic demand is hampered, thereby putting 
further  downward  pressure  on  prices.  As  a  result,  inflation  differentials  could  potentially  increase 
heterogeneity of the cyclical situation between Member States making it more likely that the common 
monetary policy is inappropriate for individual countries. 

Figure 7: Government bond yields (10-year) 

Percent

Germany

France

Italy

Spain

Netherlands

Portugal

Greece

6

5

4

3

2

1

0

-1

2017

2018

2019

2020

2021

2022

Source:   Refinitiv. 

Notes:   Daily data. 

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Inflation divergence in the euro area: nature and implications 

Differences in nominal interest rates for government bonds have temporarily receded since the peak 
of the euro area debt crisis, but they are still there. Compared to 2021, the respective risk spreads of 
highly-indebted countries have re-increased to alarming levels raising the spectre of another sovereign 
debt  crisis  (Figure  7).  This  “fragmentation  risk”  urged  the  ECB  to  introduce  a  new  instrument,  the 
“Transmission Protection Instrument” (TPI), to counteract tendencies that refinancing costs between 
Member States drift further apart. Large interest rate differentials for government bonds may translate 
to different financing conditions for the private sector, because government bonds serve as benchmark 
assets for domestic financial markets.  

The gross  domestic  product (GDP)  deflator  has also  shown  remarkable differences within  the 
currency union. Consumer prices are subject to major changes in import prices, while the GDP deflator 
basically indicates at what rate the price of domestic value added increases. Therefore, a closer look at 
this domestic component of inflation is warranted. For example, at the onset of the currency union, the 
GDP deflator increased at a much faster rate in Spain – at about 4% on average between 1999 and 2008 
– in contrast to Germany, where the increase was merely 1% on average. This differential may have 
fuelled  the  domestic  boom  and  housing  bubble  in  Spain,  where  the  single  monetary  policy  was 
probably  too  lax  at  that  time,  whereas  an  ailing  German  economy  likely  needed  a  less  restrictive 
monetary policy stance. After the global financial crisis, these trends partially reversed. GDP deflator 
growth in Spain fell to a level close to zero until approximately 2017, whereas it increased steadily at 
about 1.5-2% on average for Germany. Lately, in 2022, the GDP deflator increased markedly in Germany 
and the Netherlands at about 5-6%. In Spain, the GDP deflator increased by about 4%, and in France 
and Italy, the increase was merely 2% in the first half of 2022.  

For  the  sustainability  of  public  finances  and  government  debt,  the  interest-inflation  differential 
matters. Public debt sustainability depends not only on nominal interest rates, but also on growth of 
nominal GDP, which is the combination of real GDP growth and the increase of the GDP deflator. A 
country that faces low interest rates, high rates of economic growth and large increases in the GDP 
deflator is in a much more comfortable position with respect to debt sustainability than a country at 
the  other  side  of  the  spectrum.  In  the  latter  case,  low  domestic  inflation  can  be  problematic,  in 
particular if the average inflation rate of the euro area, which determines the monetary policy stance, 
is higher than the domestic one. The case of Italy could be particularly challenging, as the risk spread 
on benchmark government bond yields is relatively high, the potential growth rate is notoriously low, 
and the Italian GDP deflator has increased by considerably less (about 2% y-o-y) than the euro area 
average (4.3%) up to the second quarter of 2022. Overall, from the perspective of public debt service, 
below-average domestic inflation dynamics can be problematic. At the same time, however, if above-
average inflation dynamics accumulate in a currency union, firms from the respective country can run 
into competitiveness problems. 

Permanent inflation differentials can result in a build-up of real exchange rate misalignments. The early 
years  of  the  currency  union  where  characterised  by  a  substantial  decline  in  interest  rates  for  many 
countries,  which  fuelled  a  credit-financed  boom  and  pushed  inflation  up  in  some  of  the  periphery 
countries like Spain and Ireland. Inflation differentials kept on building up in the domestic price levels, 
as indicated by the scissor-shaped deviation in the level of the GDP deflator between Germany (black 
line below) and some of the periphery countries (Figure 8). A similar picture can be drawn with the 
development of unit labour costs within the currency union, that led to current account imbalances 
between  surplus  countries  (Germany,  Netherlands)  and  deficit  countries  (Greece,  Italy,  Ireland, 
Portugal, Spain). Since then, domestic inflation as indicated by the GDP deflator was subdued in most 
of the periphery countries, contributing to a narrowing of the previous imbalances. 

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IPOL | Policy Department for Economic, Scientific and Quality of Life Policies 

Figure 8: GDP deflator in selected Member States  

1999=100

160

150

140

130

120

110

100

90

DE
FR
IT
ES
NL
BE
AT
FI
EL
PT
IE

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

Source:   European Commission, AMECO database (Spring 2022 forecast); Own Calculations. 

Notes:   Yearly data. 

So  far,  the  recent  inflation  divergences  are  too  short-lived  to  cause  self-reinforcing  cyclical 
variations  within  the  euro  area  or  a  pronounced  deterioration  in  competitiveness  for  some 
countries.  It  remains  to  be  seen  whether  these  divergences  prevail  once  the  major  first  shock  has 
passed  and  energy  prices  stabilise  on  a  somewhat  more  moderate  level  in  a  few  quarters  or  years. 
Moreover, at least among the bigger Member States this far, countries with above-average inflation 
dynamics  as  indicated  by  the  GDP  deflator  are  not  at  risk  of  running  into  competitiveness  issues 
immediately.  

Central and eastern European countries like the Baltics have recorded persistently higher increases in 
the  GDP  deflator  for  many  years,  though  this  may  also  reflect  a  rather  benign  catching-up  process 
towards advanced economies. The Baltic countries, among others, which are not included in Figure 8 
above, would end up beyond the vertical scale at 250 to 300 in 2022. While they entered the currency 
union only in the 2010s, their former currencies were  pegged to the euro before, so that, given the 
absence  of  a  nominal  devaluation,  the  persistent  and  large  differential  of  prices  for  domestic  value 
added  led  to  a  pronounced  real  appreciation  with  respect  to  the  other  euro  area  Member  States  . 
However,  this  inflation  differential  appears  not  to  be  a  major  problem  for  exporting  firms  in  these 
newer, less developed Member States. It may rather reflect a benign catching-up process that results 
in  higher  wage  dynamics  and  inflation  rates  that  are  in  line  with  fundamentals  (see  Box  1  below). 
Nevertheless,  local  policymakers  should  carefully  monitor  their  economies  for  potential  signs  of 
overheating, excessive wage growth and loss of competitiveness, to avoid undesirable consequences. 

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Inflation divergence in the euro area: nature and implications 

Box 1: The Balassa-Samuelson theorem: benign inflation differentials? 

The Balassa-Samuelson Theorem (Balassa, 1964 and Samuelson, 1964) describes the catch-up 
process regarding income and price levels of less developed economies vis-a-vis more developed 
countries. Usually, the productivity level in the industry (relevant for goods trade) is lower in less 
developed  economies,  and  through  capital  accumulation  and  assumption  of  technological 
progress,  a  higher  productivity  growth  results  in  comparison  to  already  developed  countries. 
Hence, the real wages in the traded goods sector can increase in line with productivity without a 
loss  in  competitiveness.  The  increasing  wages  in  the  traded  goods  sector  also  trigger  wage 
increases in the domestic service sector. The degree to which wage increases spill over to services 
hinges on the level of labour mobility. As the productivity level is assumed to be constant in the 
services  sector,  the  wage  increases  also  lead  to  an  upward  pressure  on  the  general  price  level. 
Thus,  in  comparison  to advanced economies,  less  developed  countries experience higher 
inflation  while  catching  up,  along  with  an  appreciation  of  the  real  exchange  rate  under  fixed 
exchange rates (or nominal appreciation under flexible exchange rates). 

There are critical assumptions though involved to generate this effect: 

1. The productivity level of services is constant. – In reality, also an increase in productivity in the 
service sector is likely, while the increase in productivity will probably be slower for services compared 
to industrial goods production. 

2. Services are not tradable. In reality, some services are indeed tradable (e.g. IT services, consulting 
activities), but the macroeconomic aggregate of domestically produced services is to a considerably 
larger extent consumed domestically compared to industrial output.   

3.  Demand  mix  for  trade  goods  and  services  is  constant.  In  reality,  with  rising  incomes  also  the 
consumption of services usually increases relative to goods. 

4. There is no international labour mobility. In reality there is some cross-border migration. 

Additional  finding  regarding  capital  inflows:  Capital  inflows  can  lead  to  a  “pseudo”-Balassa-
Samuelson  effect,  where  real  wages  increase  beyond  the  productivity  equilibrium  path  on  a 
credit-driven demand boom (Belke et al, 2018).  

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CONCLUSION AND POLICY IMPLICATIONS 

Historically high headline inflation differentials among euro area Member States are mainly due 
to differences in the evolution of the energy component, suggesting that underlying inflation 
dynamics  is  less  of  a  concern.  Energy  price  inflation  strongly  differs  across  countries  due  to 
differences in the energy mix, but also the characteristics of household utility contracts and regulation, 
including government interventions to dampen price increases at the consumer level. Different energy 
price dynamics are also a major factor behind the increased dispersion of food price inflation. Thus, at 
the moment the historic energy crisis seems to affect inflation in the Member States differently. Over 
time, however, with adjustments to the energy crisis progressing on both the demand and the supply 
side  and  temporary  government  programmes  being  wound  down,  we  would  expect  differences  in 
price levels for energy in general and gas in particular to recede again. With respect to core inflation, 
the level of divergence is currently not particularly high among the 12 initial euro area Member States. 
While exceptionally high core inflation in the Baltic Member States is leading to an elevated level of 
inflation  dispersion  in  the  total  euro  area,  the  size  of  the  Baltic  economies  is  small.  In  addition, 
experience  with  similar  episodes  in  the  past  suggests  that  price  flexibility  in  the  Baltic  countries  is 
sufficiently  high  to  correct  any  excessive  real  revaluation  that  may  result  from  the  current  price 
dynamics in a relatively short period of time.  

A  more  co-ordinated  response  of  European  governments  to  the  energy  crisis  would  help  to 
reduce  potential  tensions  arising  from  its  different  impact  on  inflation  at  the  country  level. 
National governments in the EU followed different approaches in their response to escalating energy 
prices. While some governments concentrated on measures to assist households in particular in coping 
with higher energy bills, e.g. by extra transfers often targeted to vulnerable groups, others intervened 
heavily to limit the increase in prices. For example, in France price increases for gas and electricity have 
been capped at 15% for the year 2023, following the cap of 4% for electricity and a gas price freeze in 
2022. In Malta, gas and electricity prices did not increase at all since April 2021, according to Eurostat 
HCPI data. Substantial differences in the extent to which price intervention measures are taken tend to 
distort the common internal market. In addition, subsidised prices inhibit the role relative prices play 
for demand adjustment and will lead to higher energy demand, driving prices still higher for consumers 
in other countries. Monitoring and guiding national policies to support the proper functioning of the 
internal  market  would  be  an  important  role  for  institutions  at  the  European  level.  In  addition,  a 
common  European  medium-term  energy  strategy,  including  elements  such  as  long-term  contracts 
with potential suppliers of energy and the closure of gaps in the energy infrastructure, could stabilise 
expectations both on the supply and the demand side with potentially significant positive effects for 
all countries involved.  

Persistent inflation differentials in a monetary union can lead to self-reinforcing differences in 
the  effects  of  the  common  monetary  policy  and  a  build-up  of  macroeconomic  imbalances. 
Differences in the cyclical position of member countries and asymmetric shocks inhibit the efficient 
transmission of monetary policy across Member States of a monetary union, which, in the euro area, is 
complicated by the low level of coordination of national fiscal policies. Inflation dispersion could mean 
that the common monetary policy, which is set by the ECB with a view at the euro area level, is too 
loose  for  high  inflation  countries  and  at  the  same  time  too  tight  for  countries  with  relatively  low 
inflation  rates,  leading  to  diverging  economic  trajectories.  In  the  early  years  of  the  currency  union 
persistent differences in inflation and, hence, real interest rates, fuelled a credit-financed boom in some 
countries and eventually led to a (painful) correction of economic structures and relative price levels. 
It  is  too  early  to  say  that  the  recent inflation divergences  will  lead  to  similar self-reinforcing  growth 

PE 733.996 

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Inflation divergence in the euro area: nature and implications 

differentials in the euro area. The behaviour of underlying inflation in the euro area countries, with the 
exception of the Baltic states, rather suggests that the risk of running into competitiveness issues is 
currently limited.  

The primary objective of the ECB is to safeguard price stability for the euro area as a whole, not 
for  every  single  Member  State.  It  is  important  to  note  that  the  single  monetary  policy  has  to  be 
conducted according to the requirements of the euro area aggregate. It is not the task of the ECB to 
fine-tune the business cycle in each Member State at any point in time, let alone provide a tailor-made 
monetary policy stance for the Baltics which represent less than a percentage point of euro area GDP. 
The  ECB  does  not  have  the  tools  to  provide  identical  real  interest  rates  and  harmonised  financing 
conditions in every Member State, or to prevent real exchange rate imbalances from building up. The 
focus of attention of the ECB must be on the euro area as a whole.  

The risk of fragmentation has increased amid monetary tightening and could result in the ECB 
being soft on inflation. Given the strong inflationary pressure, the ECB is called to tighten monetary 
policy aggressively. Substantially higher nominal interest rates could result in a painful increase of real 
interest rates particularly in countries with a relatively low growth of nominal GDP and a legacy of high 
government debt. In this situation, familiar questions about debt sustainability and fragmentation risk 
re-appear (Gern et al., 2022). To alleviate concerns about a negative spiral in sovereign debt markets, 
the ECB has launched the TPI. It is nevertheless possible that in the pursuit to avoid fragmentation risk, 
the  ECB  could  be  tempted  to  lean  towards  tightening  monetary  policy  too  slowly  at  the  cost  of 
persistent deviations from the inflation target.  

Temporary inflation divergences will have to be kept in check by market forces and by policies 
in  the  Member  States.  Growth  in  high  inflation  countries  will  finally  lose  momentum  when  the 
domestic economy is increasingly priced out of the markets, and financial exposure has to be reduced. 
Such  adjustments  can,  however,  come  with  a  serious  recession.  It  is  the  responsibility  of  national 
economic  policy  to  counteract  harmful  developments  at  the  country  level,  e.g.  by  discouraging  a 
domestic credit-financed boom by appropriate regulation (e.g. institutional setup for wage formation, 
In  the  context  of 
housing  market,  macroprudential  policy)  or  fiscal  policy  (e.g.  taxation). 
macroeconomic  surveillance  (“Macroeconomic  Imbalances  Procedure”),  the  European  Commission 
extensively reports on possibly undesirable developments in EU Member States. Countries receive in-
depth analyses and economic policy recommendations from Brussels in order to counteract the build-
up of vulnerabilities and macroeconomic imbalances. This is complemented by national institutions – 
central  bank,  ministries,  research  institutes,  systemic  risk  board,  fiscal  council,  think  tanks  –  which 
analyse these issues and provide recommendations to national policymakers. If policy fails to arrest 
increasing imbalances, unsustainable economic trends will eventually be checked by market forces.  

21 

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REFERENCES 

•

•

Balassa, B. (1964). “The Purchasing Power Parity Doctrine: A Reappraisal”. Journal of Political 
Economy 72: 584-596.
https://www.journals.uchicago.edu/doi/10.1086/258965

Belke, A., Haskamp, U. and Schnabl, G. (2018). “Beyond Balassa and Samuelson: real convergence,
capital 
409–424.____________
https://link.springer.com/article/10.1007/s10663-017-9366-6#citeas

in  Greece”. Empirica 45: 

competitiveness 

flows, 

and 

• Gern, K.-J., Sonnenberg, N., and Stolzenburg, U. (2022). “Whatever it takes”: The ECB remains busy
with crisis management. Publication for the committee on Economic and Monetary Affairs, Policy
Department for Economic, Scientific and Quality of Life Policies, European Parliament,
Luxembourg. https://www.europarl.europa.eu/cmsdata/249535/Kiel_DEF.pdf

•

•

•

•

•

•

Jannsen N. and Sonnenberg N. (2022). „Gas- und Strompreise“. Wirtschaftsdienst 102 (11).
https://www.wirtschaftsdienst.eu/archiv/jahr/2022/heft/11.html

(2022).  “Hausgemachte 

Kooths,  S. 
Inflationsrisiken”.  Wirtschaftsdienst  102 
https://www.wirtschaftsdienst.eu/inhalt/jahr/2022/heft/6/beitrag/hausgemachte-
inflationsrisiken.html

(6):  434-437.

Sachverständigenrat (2022)., „Energiekrise solidarisch bewältigen, neue Realität gestalten“.
Jahresgutachten 2022/23.
https://www.sachverstaendigenrat-wirtschaft.de/jahresgutachten-2022.html

Samuelson, P. (1964). “Theoretical Notes on Trade Problems”. Review of Economics and Statistics
46: 145-154.
https://www.jstor.org/stable/1928178?origin=crossref

Sonnenberg N. (2022). “Zum Einfluss der jüngsten Gas- und Strompreisanstiege auf die Verbraucherpreise“. 
2022.7._https://www.ifw-kiel.de/de/publikationen/kiel-insight/2022/zum-einfluss-der-
Kiel 
juengsten-gas-und-strompreisanstiege-auf-die-verbraucherpreise-17633/ 

Insight 

Sonnenberg  N.  and  Stolzenburg  U.  (2022).  “Inflationsdruck  gewinnt  an  Breite“.  Kiel  Insight.
https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/-
ifw/Konjunktur/Prognosetexte/deutsch/2022/KKB_88_2022-Q1_Euroraum_DE.pdf

PE 733.996 

22 

Inflation divergence in the euro area: nature and implications 

ANNEX 

Figure 9: Service and goods inflation in the euro area 

Service Inflation from January 2021 to September 2022 

t
n
e
c
r
e
P

14
12
10
8
6
4
2
0

AT

BE

CY

EE

FI

FR

DE

EL

IE

IT

LV

LT

LU MT

NL

PT

SK

SI

ES

Goods Inflation from January 2021 to September 2022 

t
n
e
c
r
e
P

12

10

8

6

4

2

0

AT

BE

CY

EE

FI

FR

DE

EL

IE

IT

LV

LT

LU MT

NL

PT

SK

SI

ES

Headline Inflation: Mean of abs. difference from euro area rate 

Core Inflation: Mean of abs. difference from euro area rate 

#19

#16

#12

4

3

2

1

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

#19

#16

#12

2,5

2

1,5

1

0,5

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

0
2000 2003 2006 2009 2012 2015 2018 2021

0
2000 2003 2006 2009 2012 2015 2018 2021

Service  Inflation:  Mean  of  abs.  difference  from  euro  area  rate  Goods  Inflation  (NEIG):  Mean  of  abs.  diff.  from  euro  area  rate 

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

#12

#16

#19

3,5
3
2,5
2
1,5
1
0,5
0
2000 2003 2006 2009 2012 2015 2018 2021

#19

#16

#12

2

1,5

1

0,5

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

0
2000 2003 2006 2009 2012 2015 2018 2021

Source:   Refinitiv, Eurostat. 

Notes:   Mean of the absolute difference from corresponding euro area rate for 19, 16 and 12 countries respectively. Country aggregate 
#19 based on all countries of the euro area. Country aggregate #16 excludes the three Baltic countries. Country aggregate #12 is 
based on 12 initial euro area countries.  

23 

PE 733.996 

 
 
 
 
IPOL | Policy Department for Economic, Scientific and Quality of Life Policies 

Figure 10: Energy inflation 

Energy Inflation from January 2021 to September 2022 

t
n
e
c
r
e
P

120

100

80

60

40

20

0

AT

BE

CY

EE

FI

FR

DE

EL

IE

IT

LV

LT

LU MT

NL

PT

SK

SI

ES

Energy Inflation: Mean of abs. difference from euro area rate 

Fuels Inflation: Mean of abs. difference from euro area rate 

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

#12

#16

#19

35
30
25
20
15
10
5
0
2000 2003 2006 2009 2012 2015 2018 2021

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

#12

#16

#19

14
12
10
8
6
4
2
0
2000 2003 2006 2009 2012 2015 2018 2021

Gas Inflation: Mean of abs. difference from euro area rate 

Electricity Inflation: Mean of abs. difference from euro area rate 

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

#12

#16

#19

70
60
50
40
30
20
10
0
2000 2003 2006 2009 2012 2015 2018 2021

#19

#16

#12

50

40

30

20

10

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

0
2000 2003 2006 2009 2012 2015 2018 2021

Source:   Refinitiv, Eurostat. 

Notes:   Mean of the absolute difference from corresponding euro area rate for 19, 16 and 12 countries respectively. Country 
aggregate #19 based on all countries of the euro area. Country aggregate #16 excludes the three Baltic countries. 
Country aggregate #12 is based on 12 initial euro area countries.    

PE 733.996 

24 

 
 
 
 
Inflation divergence in the euro area: nature and implications 

Figure 11: Food inflation 

Food Inflation from January 2021 to September 2022 

t
n
e
c
r
e
P

30

25

20

15

10

5

0

AT

BE

CY

EE

FI

FR

DE

EL

IE

IT

LV

LT

LU MT

NL

PT

SK

SI

ES

Food Inflation: Standard Deviation 

Food Inflation: Mean abs. difference from euro area rate 

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

#12

#16

#19

7
6
5
4
3
2
1
0
2000 2003 2006 2009 2012 2015 2018 2021

#19

#16

#12

5

4

3

2

1

i

s
t
n
o
P
e
g
a
t
n
e
c
r
e
P

0
2000 2003 2006 2009 2012 2015 2018 2021

Source:   Refinitiv, Eurostat. 

Notes:   Standard deviation of 19, 16 and 12 inflation rates respectively. Mean of the absolute difference from corresponding 
euro area rate for 19, 16 and 12 countries respectively. Country aggregate #19 based on all countries of the euro area. 
Country aggregate #16 excludes the three Baltic countries. Country aggregate #12 is based on 12 initial euro area 
countries.   

25 

PE 733.996 

  
 
 
 
 
 
 
 
 
 
IPOL | Policy Department for Economic, Scientific and Quality of Life Policies 

Figure 12: Distribution of sub-group inflation rates for 12 initial euro area countries 

Austria 

Belgium 

Finland 

t
n
e
c
r
e
P

15

10

5

0

-5

-10

15

10

5

0

-5

-10

15

10

5

0

-5

-10

2000 2005 2010 2015 2020

2000

2005

2010

2015

2020

2000

2005

2010

2015

2020

France 

Germany 

Greece 

t
n
e
c
r
e
P

15

10

5

0

-5

-10

15

10

5

0

-5

-10

15

10

5

0

-5

-10

2000 2005 2010 2015 2020

2000

2005

2010

2015

2020

2000

2005

2010

2015

2020

Ireland 

t
n
e
c
r
e
P

15

10

5

0

-5

-10

Italy 

15

10

5

0

-5

-10

Luxembourg 

15

10

5

0

-5

-10

2000 2005 2010 2015 2020

2000

2005

2010

2015

2020

2000

2005

2010

2015

2020

Netherlands 

Portugal 

Spain 

t
n
e
c
r
e
P

15

10

5

0

-5

-10

15

10

5

0

-5

-10

15

10

5

0

-5

-10

2000 2005 2010 2015 2020

2000

2005

2010

2015

2020

2000

2005

2010

2015

2020

Source:   Refinitiv, Eurostat. 

Notes:   The graph shows quantiles of the distribution of sub-group inflation rates of CPI components at the 4-digit level 

(approx. 101 subindices).  

PE 733.996 

26 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Inflation divergence in the euro area: nature and implications 

Figure 13: Distribution of sub-group inflation rates for newer euro area countries 

Cyprus 

Malta 

t
n
e
c
r
e
P

15

10

5

0

-5

-10

15

10

5

0

-5

-10

2000 2005 2010 2015 2020

2000

2005

2010

2015

2020

Slovakia  

Slovenia 

t
n
e
c
r
e
P

30

25

20

15

10

5

0

-5

-10

30

25

20

15

10

5

0

-5

-10

2000 2005 2010 2015 2020

2000

2005

2010

2015

2020

Estonia 

Latvia 

Lithuania 

t
n
e
c
r
e
P

40

30

20

10

0

-10

-20

40

30

20

10

0

-10

-20

40

30

20

10

0

-10

-20

2000 2005 2010 2015 2020

2000

2005

2010

2015

2020

2000

2005

2010

2015

2020

Source:   Refinitiv, Eurostat. 

Notes:   The graph shows quantiles of the distribution of sub-group inflation rates of CPI components at the 4-digit level 
(101 subindices). For Cyprus and Malta the same scale as for the 12 initial euro area member is used. For Slovakia 
and Slovenia, the scale is adjusted upwards. For the Baltic countries the scale had to be adjusted further upwards. 

27 

PE 733.996 

Not only has inflation in the euro area accelerated to historical levels in 2022, but also the dispersion 
of inflation across Member States has risen strongly. We investigate the nature of this dispersion and 
find that it is driven by energy and food prices, whereas differences in core inflation are not unusually 
high, except for the Baltic countries. While large differences in inflation can lead to an undesirable 
divergence in growth trajectories, this cannot be addressed by the common monetary policy which 
should strictly focus on price stability in the euro area as a whole. 

This  paper  was  provided  by  the  Policy  Department  for  Economic,  Scientific  and  Quality  of  Life 
Policies at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the 
Monetary Dialogue with the ECB President on 28 November 2022. 

PE 733.996 
IP/A/ECON/2022-57 

PDF 

ISBN 978-92-846-9911-7 | doi: 10.2861/691083 | QA-04-22-177-EN-N