The OECD said the widening gap in inflation rates between euro zone countries is a positive development that can help economies adjust.
"Indeed, diverging rates reflect different levels of economic activity in individual countries," the OECD said in a study to appear in the final version of its semi-annual Economic Outlook.
"Wider divergences in inflation rates within the euro area can be a positive way for economies to adjust to different levels of activity. Workers in the euro area, unlike in the US, are reluctant to move from a region where economic activity is weak to one where it is more buoyant," it said.
The OECD said euro area-wide inflation remains stubbornly above the European Central Bank's 2 per cent price stability ceiling because inflation rates in slower-growing countries, such as Germany and Italy, have not declined sufficiently to offset higher rates in faster-growing economies, such as Ireland, which has the highest inflation rate in the euro zone at 4.4 per cent.
It said "stubbornly high" inflation rates in some countries are the result of strong worker resistance to wage cuts, stringent job protection rules and companies' slowness to adjust prices. Firms pass cost rises to customers more quickly than they pass cost cuts, it said.
ECB chief economist Mr Otmar Issing yesterday said the ECB is concerned inflation has not declined at a time of slowing growth, and blamed this on market rigidities, particularly in wages.
The OECD said one possible response would be to raise the ECB's euro zone inflation target from its current 0-2 per cent range, and said this could make it easier for the economy to deal with rigidities.
But it said such an approach would damage the ECB's credibility and that a better course of action would be structural reforms to raise productivity.
AFP