Price Level Convergence and Inflation in Europe

The authors present direct evidence on price level convergence in Europe, using a unique data set. They then investigate how much of the recent differences in national inflation rates in the euro area can be explained by faster rising prices in the low-cost euro countries (i. e. by price level convergence within Europe). Between 1990 and 1999, prices became less dispersed in the euro area. Convergence was especially evident for traded goods, more in the first half of the 1990s than the second half. For tradables, price dispersion in the euro area has fallen into the range found in the United States. While price level convergence contributed to observed inflation differences within the euro area, other forces explain most of the current cross-country differences in euro area inflation.