Inflation Differentials in the Euro Area at the Time of High Energy Prices

This paper investigates the drivers of inflation differentials in the euro area.

Highlights:

• Inflation differentials in the euro area widened in 2022 to historically high levels in the context of a surge in energy and other commodity prices.
• A very large common shock propagated differently across the euro area due to differences in energy intensity and the structure of the economy.
• The asymmetric impact of a common shock – mostly related to the increase in energy and food prices – can explain around half of the increase in headline inflation in 2022 in the euro area.
• The estimated responses to the common factor increase with energy intensity, reflecting the important role of energy prices in driving global shocks to inflation, and decline with the share of services in Gross Value Added (GVA), suggesting that countries with a larger manufacturing sector have been more sensitive to common factors affecting inflation.
• Inflation persistence is another important contributing factor. This persistence might be associated with a relatively long pass-through for the energy shock, related to the staggered nature of supply contracts and price setting in the euro area.

Information and identifiers

Discussion Paper 197. November 2023. Brussels. PDF. 42pp. Tab. Graph. Bibliogr. Free.

KC-BD-23-014-EN-N (online)
ISBN 978-92-68-01757-9 (online)
ISSN 2443-8022 (online)
doi:10.2765/052803 (online)

JEL classification: E31, F45, Q41, Q43     

Disclaimer

European Economy Discussion Papers are written by the staff of the European Commission’s Directorate-General for Economic and Financial Affairs, or by experts working in association with them, to inform discussion on economic policy and to stimulate debate. The views expressed in this document are solely those of the author(s) and do not necessarily represent the official views of the European Commission.