Eurozone Inflation Convergence: Deceptive Appearances

Abstract

Understanding the inflation cycles of each member state is imperative in light of the European Central Bank's primary objective, which entails maintaining price stability for the countries that have adopted the Euro currency. To this end, we have used wavelet-based methods to analyse inflation in the twelve countries that constituted the initial group to adopt the Euro from 2001 to the end of 2023.

The study demonstrates an increase in synchronisation of inflation rate cycles in almost every country over time. However, once we control energy commodity prices, the previously observed convergence disappears, indicating that energy price shocks, a consequence of the war in Ukraine, are the leading cause of the initially identified patterns.