Inflation and the EU
- Convergence criteria
- European Central Bank (ECB)
- Harmonised Index of Consumer Prices (HICP)
- Purchasing power
- Stability and Growth Pact (SGP)
- EMU is marked by historically low and stable inflation.
- Economic convergence has helped to control previously high and volatile inflation rates.
- Inflation rates vary among EU Member States and regions.
The EU economy under Economic and Monetary Union (EMU) has been marked by historically low and stable inflation. This general positive development is the result of a number of factors: the requirements of the EU Treaty for all Member States (such as the budget rules enshrined in the Stability and Growth Pact), the monetary policy of the European Central Bank, and the benign global environment.
The drive towards economic convergence
High and volatile inflation rates were a common feature before the euro. At the beginning of the 1990s, once the EU Member States decided to prepare for the euro, inflation began to fall consistently. The drive towards economic convergence helped to control the high and volatile inflation rates experienced during the 1970s and 80s, and brought about the stable inflation rates that are essential to protect the value of people’s incomes and paving the way to sustainable growth and job creation in the EU.
In preparing for the introduction of the euro, a Member State must follow the convergence criteria set out by the Maastricht Treaty. The criteria include the requirement that the Member State's inflation rate is not more than 1.5 percentage points above the rate of the three best performing Member States.
Differences in inflation rates
Despite the convergence achieved in the run-up to the euro and the improvement in the functioning of the internal market, there are persistent differences in inflation rates among euro-area countries and, even within those countries, between different regions. Why do these differences occur?
The variation in inflation rates reflect the particular economic conditions that exist at national and regional levels.
Individual citizens, households and businesses can experience differences in inflation rates due to income differences, varied consumption preferences and patterns, the extent of local price competition, different tax rates and transport costs, for example.
To capture these differences, national statistical services collect price data that fully take into account the existing economic differences within their territories (Measuring inflation in the EU).
It should be noted that inflation differences are not significantly higher in the euro area compared to other large monetary unions such as the US.
Inflation in the euro-area candidate countries
The newer Member States that are preparing their economies for adopting the euro usually have higher inflation rates than those in the euro area.
As these countries restructure their economies to meet the criteria for joining the euro area, GDP can experience a burst in growth, leading to higher consumer demand and higher prices. This phenomenon is perfectly normal for catching-up economies. When these economies converge with those in the euro area, and the catching-up process is exhausted, their inflation falls towards lower, more stable rates.