WP 2024-10.
Executive Summary
When comparing inflation across European countries, we often overlook a simple fact – inflation is the
percentage change in the price level. The rate of inflation therefore depends on base prices. This phenomenon
has been particularly important during the 2022-23 inflation episode, when countries have been facing the
same energy shock. The key takeaway is that the price level plays a crucial role in explaining different inflation
rates in services, where the price level differences are biggest. In this article, we explain how a higher price
level – due mainly to higher wages – insulates the economy from cost shocks to inflation. This means that
countries with higher headline or core inflation following a major cost shock are not necessarily overheating
more than those with lower inflation.
Inflation_Rates_in_Europe_Legacy_of_the_Iron
