Sectoral and Aggregate Inflation Dynamics in the Euro Area

This paper synthesises the implications of recent statistical evidence regarding inflation persistence in the euro area. For aggregate data, the degree of inflation persistence appears to be very high for sample periods spanning multiple decades but falls dramatically once we allow for time variation in the mean level of inflation; furthermore, the timing of these breaks in mean generally coincides with observed shifts in the monetary policy regime. Finally, sectoral inflation series exhibit much less persistence than aggregate inflation, mainly because of the influence of transitory sector-specific shocks. (JEL: E31, C22, C43) (c) 2006 by the European Economic Association.