Price Competitiveness in the European Monetary Union: A Decomposition of Inflation Differentials based on the Leontief Input-Output Price Model for the Period 2000 to 2014

This paper studies the persistent producer price inflation differentials within the European Monetary Union. By applying a decomposition procedure within the input-output framework, the drivers of sectoral producer price inflation in a representative sample of member states are re-vealed. We find that in the pre-crisis period (2001-2008) the inflation differentials in manufactur-ing and market services of all countries vis-à-vis Germany were consistently positive resulting in a loss of price competitiveness for all economies. Manufacturing and market service sectors of many countries continued to lose price competitiveness, though to a lesser extent, also during the crisis period (2009-2014). We observe that differences in unit labour cost developments across countries constitute an important driver, especially in the pre-crisis period. Other drivers, such as import costs, intermediate input costs and operating surpluses also contribute, in particular dur¬ing the crisis period.