Why inflation differs across countries
20 November 2024
By Mehtaj, Mohamed Achraf and Rumpf, Matthias
The ECB is tasked with maintaining price stability for the euro area, which requires a focus on the inflation rate for the monetary union as a whole. But as the euro area economy is not uniform, prices for goods and services do not change to the same extent in each country. National and regional inflation rates can vary significantly. This blog post looks at why these differences occur.
Varying price dynamics do not only exist between countries. They can also be observed within a single large country made up of multiple states, or between different regions – for example booming cities versus remote rural areas. Despite these variations, inflation is usually reported at the national level, which gives the impression that prices are changing uniformly across a country.
Often, these differences occur when countries or regions are at different stages of the economic cycle. During economic downturns, when demand is lower, inflation tends to decrease. On the other hand, inflation increases during economic upturns, when economies are booming. If countries are in different stages of this cycle at the same time, their inflation rates will diverge. Additionally, the magnitude and duration of the different stages of a cycle may differ across countries, which also leads to differences in the inflation rate.
Differences in inflation can also arise from changes in the prices of specific products or product groups. A clear example of this is the energy price surge following Russia’s full-scale invasion of Ukraine in 2022. Some countries saw a larger increase in energy prices than others (e.g. due to higher imports of Russian gas in the past), which led to higher inflation in those countries.
To explore how inflation differs across products and countries, refer to Chart 1, which shows inflation rates for the 12 product groups represented in the Harmonised Index of Consumer Prices (HICP). Use the drop-down menu at the top of the chart to compare inflation rates across different product groups, both for the euro area and for individual euro area countries.
Price differences can be influenced by market forces, but they can also be the result of government policy. In some cases, prices are set or regulated by national governments or local authorities, as is often the case with the cost of public transport. Changes in these “administered prices” can have a temporary impact on inflation in a given country. This also happens when taxes on goods and services are adjusted. For example, a reduction in value added tax in one county can lower prices for many goods and services and, consequently, temporarily the inflation rate.
How people spend their money and their consumption habits also affect inflation. In some countries, a higher percentage of household spending goes towards food, which tends to have higher inflation rates. As a result, these countries may see a higher overall inflation rate.
The HICP takes these differences in consumption patterns into account by using a specific consumption basket for each country when calculating national inflation rates. Chart 2 illustrates the relative weight of different product groups in the consumption baskets of the euro area and of individual countries. Use the drop-down menu at the top of the chart to compare the relative weight of different product groups for the entire euro area and for specific countries.
Several factors may contribute to different inflation rates across counties. They include the macroeconomic situation, price differences for individual products, government intervention and the composition of the HICP consumption basket. It’s vitally important to understand these factors fully in order to draw accurate and useful conclusions from inflation data.
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The views expressed in each article are those of the authors and do not necessarily represent the views of the European Central Bank and the Eurosystem.