These may lead to different price developments across countries within the Monetary Union in the short run via indirect tax changes, liberalisation measures and administrative price changes. These are generally not of the same magnitude and timing across countries. Differences in growth and inflation may also occur over relatively short periods due to the occurrence of “asymmetric shocks” or differences in the responses to common shocks. A very clear example of such an asymmetric shock was German reunification. Other shocks affect countries in a more or less similar fashion - for example, recent increases in oil prices have tended to lead to higher consumer prices in all euro area countries in the past few months. Shocks may affect countries in a diverse way due to different structures of the economy, patterns of trade and/or production for example. Evidence tends to suggest, however, that the industrial specialisation of the euro area countries is not one-sided, so that there is no risk of significant asymmetric effects. Moreover, the high degree of trade between euro area countries means that country- or region-specific developments tend to have significant spillover effects within the euro area. Nevertheless, a common shock may have different consequences, depending on the precise institutional frameworks within the different countries. The possible so-called “second-round effects” of oil prices on wage and price developments may be considered to fall into this category. Short-term or cyclical differences in demand pressures - though difficult to measure with precision - are an important cause of short-term variations in price increases.

There is a relatively high degree of correlation in the cyclical developments of euro area countries over a longer time period, and recent differences in growth rates have not been particularly unusual. Nevertheless, different cyclical positions may lead to variations in price pressures. Longer-term factors leading to national differences Turning to the longer-term factors, the trend rate of growth may be higher in some countries due to the process of “catching-up” in terms of productivity and living standards with other euro area countries. It is likely that this has been happening in some euro area countries over the past few decades. In others, the trend rate of growth may be higher due to the fact that the economy is at a more advanced state of liberalisation and deregulation. In terms of the current differences in inflation rates across euro area Member States, longer-term factors are important. It may first be noted that even if inflation rates for all individual goods were identical across countries, the overall rate of increase in consumer prices would differ because there are differences in tastes and preferences across countries and therefore the bundle of goods consumed, and thus the weights of the various goods in the overall price index, differs from country to country. This can also, of course, have consequences for short-term divergences in inflation rates across euro area countries. The “catching-up” effect for countries whose living standards are rising towards the average euro area level also has consequences for inflation differentials.