different inflation rate in eurozone ?

Discussion in 'Economics' started by priyesh, Dec 19, 2010.

  1. priyesh

    priyesh

    hi, i was trying to understand some concepts but still not clear about it. why national inflation rates are so different within the eurozone, in spite having same currency euro? any comments please.

    thanks :)
     
  2. That is a great question! Can you supply some detai of the different inflation rates among EMU members? What is the metric for the rates, national CPI or some such index?

    I suppose the issue is one of degree. I need to see how divergent the rates are. In the U.S. there are different regional rates of inflation and different sector rates. If you drill into the detail of the CPI for instance you can see the different catagories...CPI-U for all urban workets, Cities index CPIs...small cities, medium cities, large cities; CPI-W for all workers...Easter, Wester, and Southern Regions and so on. There is significant variablity in these numbers from the national numbers. I suppose that is some regions the demand for goods and services is higher than in other regions, even though the currency is the same. Note today the release of U.S. census data showing growth in the south and west and decline in the rust belt of the U.S. These sort of segmentations in demand for the common currency should net out over time if there is labor mobility and capital mobility...on the other hand where local practices encourage the inflow of capital and labor with above average growth you would expect rising prices in those areas...it is not clear that the proper way to think about it is as 'inflation' per se or rather a regionally segmented supply and demand imbalance.

    Post the data detail and see what other people think.
     
  3. Each Eurozone country's statistical agency (for an overwhelming majority of them) publishes their own CPI numbers. At the same time, they publish a version that is harmonized to the common European standard, HICP (Harmonized Index of Consumer Prices). The differences vary and are due to different methodologies used. This is probably NOT the difference you're referring to...

    The individual states' HICP numbers get aggregated into the single Eurozone HICP print by Eurostat (MUICP is used for the most widely quoted YoY number). The weights used to combine the individual countries's HICP into the single European print are roughly based on GDP. This probably answers your question, as some individual country prints have a very small weight in the Eurozone average. All this can be found here: http://epp.eurostat.ec.europa.eu/portal/page/portal/help/faq#DATA2.1

    Having read your question more closely (which I should have done in the first place), in terms of the actual differences, they have a lot to do with Trichet's favorite pet peeve, i.e. "indirect taxes and administered prices", by which he means things like VAT, utilities etc.
     
  4. Maringhoul, thanks for the info on the data. I suspected that the variance could be in the measure itself. It is important to distinguish between the index we use to measure inflation and the idea of inflation itslef. 'Inflation' is ofter confused with price change as measured by such flawed indexes. Properly understood, inflation is not just price change behavior. It is price change behavior that has a monetary driver. Price change also occurs from supply demand imbalance and prior accumulated monetary mistakes that disrupt investment in long cycle productive capacity and distribution and then show up in supply demand price change later. Measures like the CPI pick up price change no matter what the cause. This is why monetary economists focus on the core rates trying to avoid some of the supply demand variation. I look at capital flow more than CPI to discern the level of inflation as process. It is always characterised by a flow of capital out of financial assets and into tangilble assets with expanding and accelerating credit formation. That is not immediately evident in price index measures but you can see it in aggregate banking data as change in assets and reserves. Of course, that is not what is going on now.
     
  5. moarla

    moarla

    different taxes
    different earning situations etc....
     
  6. Yep, although I don't look at inflation on quite such a grand scale myself, Ed... I just punt them linkers, y'know? Buy high, sell low, that sorta thing :).

    At any rate, yes, you're generally right, but the Eurozone is an interesting place, where all sorts of different inflation dynamics occur in different places. In fact, the lack of harmonization in actual domestic inflation among the member states (due to independent tax policies and protectionist measures) is another issue for the Eurozone, given that the ECB always looks solely at the aggregate measure. You could argue that it's one of the reasons why they turned a blind eye on the periphery bubbles in the past and are now paying the price.
     
  7. Martinghoul, things like unharmonized tax structures, different vat taxes and segmented markets should not properly be considered 'inflationary' per se, even if they do have some impact on price behavior. That was the whole point of my previous post. This matters becuase the perception of what is driving price change measured by these indexes is the basis on which monetary policy is made. Growth itself will create supply demand imbalance that shows up CPI data...if you mistake growth for monetary inflation and react to restrain credit you will at first not succeed and then eventually create a contraction and business cycle crises. We've do a lot of that all around the world. In addition I question the lasting impact of market segmentation in the purportedly free maket EU Zone given the normaliziing impact of the internet and the continuing evolution of EU open market law. While taxes do have an immediate impact on price structure they lose thier impact on the CPI measure after they are introduced...the measure of course compares points in time to measure on going change...once a tax is applied it has an immediate change but thereafter it is absorbed into the price structure. The more important impact of un-harmonized (not that I would ever recommend harmonization) tax policy is that it impacts growth differently. The problem with one currency managing different growth rates, or different velocities of debt formation in different locals is the issue you want to get at. Inflation in Ireland before the deluge was driven by the availability of cheap debt (at German rates) to a small growing economy with favorable fiscal growth policies. This of course pushed collateral asset prices to unsustainable levels and now the banks are insolvent with the value collapse. Greece is different in that they did not have favorable fiscal growth policies but used their access to cheap German debt to perpetuate thier unsustainable spending, they borrowed to spend and to make pension promises and entitlements that they cannot now keep. In Greece the governemt is broke and they have no hope of growth. I Ireland the banks are broke and the Government jumped into the debt sharing plan. Now they are likely to make thier fiscal environment less growth friendly and proceed to make Baclava out of their Irish Soda Bread.
     
  8. Why talk about inflation rate without mentioning interest rate differentials...
     
  9. I didn't mean that the lack of a single comprehensive tax policy is necessarily inflationary. My point was that it's, unfortunately, another flaw in the construction of the EMU, for all the reasons you have brought up yourself. As to what happened with peripheral bubbles, ask yourself this: why has the ECB with all its BuBa-inspired inflation-fighting credentials completely missed it? To me it's simply because they have always looked at the Germany-dominated average and Germany in the 90s was going through reunification, which obviously was a drag on growth and inflation. We're seeing smth quite similar now, but with roles reversed.

    What interest rate differentials are you referring to?