Abstract:
The European Central Bank's monetary policy addresses the euro-area average inflation rate. By setting conditions for the area as a whole it should ensure symmetric price adjustment. Indeed, consumer price inflation rates provide little evidence of asymmetric adjustment during 2009-11. Only Ireland, which is too small to trigger a symmetric reaction, had significantly lower inflation rates. Some asymmetry is visible in total economy unit labour costs (ULC), but ULC developments are largely disconnected from consumer price inflation. Wage developments have been more symmetric, but are also disconnected from inflation rates. Monetary policy therefore cannot do more to react to the southern euro-area recessions. Rigidities need to be removed so that recessions lead to lower prices. European Commission forecasts suggest that Greek inflation rates can be expected to fall, but Italian and German inflation rates will not adjust in the right direction during 2012-13. Less inflation in Italy and more inflation in Germany are urgently needed.
