After the Inflation Shock. Taking Stock of Price and Cost Competitiveness in the EU

This paper aims to assess price and cost competitiveness positions of EU Member States in the wake of the recent inflation shocks. It builds on a Commission note and publication of early 2023, around the time when inflation rates in EU were close to their peaks. As inflation differentials have markedly narrowed since then, this paper takes stock of changes in cost and price competitiveness positions to assess the potential risks. It does so by estimating real exchange rates misalignments. The paper also explores how various drivers of inflation, namely imported inflation, domestic wages and profits, contributed to the heterogenous price dynamics. The paper primarily examines Member States that have recently faced very high inflation, while also considering low-inflation countries, as they have impacted price and cost competitiveness in other countries. To account for high volatility in the past six years, year 2019 is set as a benchmark for all comparisons in this analysis. The main finding is that the strong appreciation of costs and prices in some Member States, particularly in Central and Eastern Europe, has not been matched by productivity growth leading to the deterioration of their competitiveness positions