A careful treatment of inflation is crucial for our exploration of its comovement with output.The inflation dynamics in our case are considered along three dimensions – long-run,cycle and short-term variations. The long-run dynamics of the inflation should–ideally, if the regime is credible–be given by the inflation target of the central bank which anchors long term inflation expectations.4 In the case of the ECB, the target is constant and, explicit since 1999, which simplifies the analysis. Cyclical dynamics of inflation are presumably greatly affected by persistent demand, productivity and various forms of cost-push shocks. The subjectof our analysis comovement of output and cyclical component of inflation. Measures of consumer-price inflation, annualized quarterly growth rates, also feature a very large portion of high-frequency variation. These are sometimes straightforward to interpret, but often they are viewed as noise arising from mis-measurements, quasi-seasonal effects and complex patterns of relative price changes etc. In general, one does not always expect the high-frequency variation of prices to be fully explained by economic theory.