The acceleration of inflation in OECD countries since mid-1988 led to policy counteraction using mainly monetary policy instruments. In the US, monetary restriction gradually succeeded in reining in inflation, but also provoked a recession. Also in other countries with strong inflationary pressure, such as the UK and Canada, economic activity slowed as a consequence of stabilization measures taken. Even traditional high-inflation countries now took firm action, like France and, to some extent, Italy. Worldwide slow growth – downward pressure on raw material prices The lasting slowdown of growth provoked by monetary policy exerted strong downward pressure on raw material prices. For manufacturers in Austria and other countries the fall in commodity prices was accentuated by a declining dollar exchange rate. Moderating wage inflation In many countries, a slower pace of wage increases contributed towards deceleration of inflation. Thus, wage increases have moderated significantly since the late 1980s in France, the UK, Italy and the Scandinavian countries. In North America and Japan where wage pressures have traditionally been weaker, pay rises further abated as from 1992. Special developments caused by German reunification While inflation has thus decelerated in most OECD countries since late 1990, this was not the case in Germany and its neighbors where the shock from German reunification stimulated economic growth and, subsequently price and wage pressures. In 1993, Austria and Western Germany registered the highest wage increases, as was the case in 1992 (abstracting from some southern OECD countries). This rank order war mirrored by inflation rates. Currency depreciations outside the DM area The exchange rate adjustments that occurred in autumn 1992 could have been expected to lead to some convergence of inflation rates which, however, did not materialize. Inflation remained low in the devaluing countries while staying high in the DM area, with conventional mechanisms seeming to have been set out of force. Only partial pass-through of devaluation effects in countries in deep recession A rough comparison between exchange rate changes and price developments in de- versus reevaluating countries, allowing for the usual time lag in price reactions, suggests an incomplete pass-through of exchange rate effects. In countries like Finland, Sweden and the UK, where demand had fallen sharply already at the beginning of the 1990s higher import prices were only partially passed on to domestic consumers. Strong impact from special factors Over the last years, a number of special factors have blurred the relation between exchange rate changes and the domestic price level. Among these are hikes of public charges, changes in major tax rates and the lowering of agricultural prices. Large policy room for manoeuvre Even abstracting from special factors, the group consisting of those goods and services whose price developments are largely insulated from external influences, is quite large. Economic policy may use this group to manoeuvre via incomes policy, price administration or tax measures. Thus, the government of the Netherlands made use of such opportunities by lowering the general VAT rate, thereby bringing inflation on a downward trend and preventing the development of a price-wage spiral.