Ezone Versus U.S. Consumer Price Inflation

August 14, 2008

Consumer prices in the United States rose 5.6% in the 12 months to July compared to their increase of 4.0% in the euro area.  That 1.6 percentage point (ppt) differential compares to spreads of 0.6 ppt in the year to July 2007, 1.7 ppts in the year to July 2006, 1.0 ppt in the year to July 2005 and 0.7 ppts in the year to July 2004.  Over the past five years (60 months), consumer prices climbed 19.0% in the United States but 13.3% in Euroland,  A 5% advance of the euro against the dollar would have been needed to neutralize the erosion of U.S. competitiveness caused by relatively high internal inflation.  Instead, the euro is presently worth 31% more against the dollar than it was in July 2003.  Dollar depreciation since 2002 is consistent with relatively high U.S. inflation but stemmed from several other factors as well.

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