Euro area consumer prices adjusted more frequently during 2021-2024 inflation surge
A new Banque de France working paper documents that the monthly frequency of consumer price changes in the euro area rose to 12 percent in 2022 during the 2021-2024 inflation cycle. This increase was driven by more frequent price increases, with services prices remaining elevated longer.
Frequency of price changes surged and then receded
The study, based on 190 million price quotes from nine euro area countries, reveals a significant increase in consumer price change frequency during the 2021-2024 inflation cycle.
In 2022, the monthly frequency of price changes reached 12 percent, a notable rise from the 8 percent average observed between 2010 and 2019.
This frequency peaked at nearly 16 percent in January 2023.
The increase was primarily driven by a higher number of price increases, rather than a substantial change in the average magnitude of price adjustments.
As inflation subsided in 2023 and 2024, the frequency of price changes gradually returned to pre-pandemic levels for food and non-energy industrial goods.
However, for services, the frequency remained elevated throughout 2024, indicating more persistent price stickiness in this sector.
Products with a larger share of imported energy costs exhibited a stronger and faster response in their price adjustment frequency.
When prices become more flexible
The paper's findings are consistent with state-dependent pricing models, where the probability of price adjustments increases with the gap between actual and optimal prices.
This mechanism implies a steepening of the Phillips curve during high-inflation periods.
The analysis further decomposes inflation dynamics into extensive (how often prices change) and intensive (how large changes are) margins.
During the recent surge, the extensive margin played a more significant role in inflation variation than typically observed in low-inflation environments.
A macroeconomic model simulation suggests that without this increased price flexibility, peak inflation in the euro area would have been almost one percentage point lower.
While the overall episode of increased price flexibility appears temporary, the persistent elevation in services price change frequency warrants continued attention.
A temporary shift with lasting lessons
This study provides crucial empirical evidence on how price-setting behavior adapts during high-inflation periods, confirming the relevance of state-dependent pricing models.
It underscores that increased price flexibility can make inflation more responsive to monetary policy, a key insight for central banks navigating volatile environments.
However, the persistent stickiness in services prices suggests that underlying wage pressures remain a challenge, even as overall price change frequencies normalize.