Euro Appreciation Reduces Inflation Rate

The current appreciation of the euro against the US dollar and other currencies will have a dampening effect on the inflation rate in the Eurozone, as measured by the Harmonized Consumer Price Index.

A current study by the Centre for European Economic Research (Zentrum für Europäische Wirtschaftsforschung, ZEW), Mannheim, shows that a ten percent rise of the euro in relation to the currencies of the most important trading partners will reduce consumer prices by close to 0.4 percent within the following twelve months. The most recent five percent increase of the nominal effective euro exchange rate since the beginning of the year could therefore lead to a reduction of the inflation rate by 0.2 percent.

Therefore, the external value of the euro will probably play an important role in this year's monetary policy of the European Central Bank: The appreciation of the euro and its repressive effect on inflation, reduce the probability of an interest rate increase within this year.

The ZEW study which analyses empirically the interrelation between exchange rates and inflation for the six largest countries of the Eurozone over the last 20 years is available as Discussion Paper No. 02-20.

Contact

Dr. Felix Hüfner, E-mail: huefner@zew.de

Prof. Dr. Michael Schröder, Phone +49 (0)621 1235-140, E-mail: schroeder@zew.de