Inflation and Inflation Uncertainty in the Euro Area

3. Empirical Analysis

3.1 Data Description

Our preferred measure of inflation is the monthly rate of change of the seasonally
unadjusted Harmonised Index of Consumer Prices (HICP) for the Eurozone as a
whole.¹ The sample period is 1980:m1 - 2009:m2. Chart 1 below plots this series
from 1990 onwards together with the corresponding year-on-year growth rate. Visual
inspection suggests declining inflation and relatively subdued variability in the run-up
to EMU and stable inflation afterwards with increased variability, particularly so
towards the end of the sample.

Chart 1. EMU Inflation

Chart 2 shows the seasonally unadjusted monthly unemployment rate. The series
exhibits a cyclical pattern and is clearly linked to output developments over the same
period. Finally Chart 3 contains the scatter plot of inflation against the unemployment
rate. Consistently with the expectations-augmented Phillips curve framework (Phelps,
1967, and Friedman, 1968), it suggests that there is an inverse relationship between
inflation and the unemployment rate and that a downward shift might have occurred
at the start of EMU. Further, the curve appears to be flatter in the euro years. ²

¹ “Euro area (changing composition) - HICP - Overall index, Monthly Index, Eurostat, neither
seasonally nor working day adjusted”. Eurostat code: VAL.IDX05.EMU.00. This series is available
from January 1990, and has been extended backwards using a weighted average of the growth rates of
the corresponding national series for France, Germany, Italy and Spain.

² “Euro area (changing composition) - Standardised unemployment rate, Total (all ages), Total (male &
female), Eurostat, neither seasonally or working day adjusted, percentage of civilian workforce”. The
series is available from      January      1993, with Eurostat code:

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