How can it be, that inflation can be different in countries that have the same currency?

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For example within the European Union. Germany has a higher inflation rate than France, even though the countries both have the Euro.

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Anonymous 0 Comments

Presumably the root of your question is that, since there is one European Central Bank, presumably when money supply grows in the Eurozone, it should grow essentially uniformly among the countries in the Eurozone, and if inflation is entirely or essentially entirely driven by a growth in the money supply, you would expect inflation to be uniform throughout the Eurozone.

However, inflation isn’t the same as an increase in the money supply. It can be *caused* by an increase in the money supply which happens more quickly than the growth of the real economy, but it can also happen for a bunch of other reasons.

To give a particularly relevant example, let’s say that your country gets a lot of its energy supplied via a pipeline that delivers natural gas from a different country. Let’s also say that the country supplying your natural gas did something you don’t like, and your supplier is trying to make sure that you don’t respond by reducing the gas supply as a demonstration of what it can do to your economy. In the short and medium run, energy prices in your country will certainly rise substantially, because the pipeline provided a cheaper way to get energy into your country than whatever alternatives you have. And because energy is an input to essentially everything in a modern economy, prices of everything else will also rise. However, other countries which didn’t get a lot of energy from the pipeline won’t see nearly as substantial change in their energy prices. They may actually see an increase as a result of the pipeline being deliberately restricted, because the people in your country will be willing to spend more money to get the same amount of energy, and the effect of competition will cause prices of energy to rise elsewhere, but this will be a much smaller effect.

This rise in the general price level is the conventional way that people define inflation. As you can see, it can happen without any change in the money supply at all, and there can be factors unique to a particular country which cause a substantial rise or reduction in inflation, which are much less relevant to other countries.

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