Euro area price stickiness during inflation surge quantified
A Banca d'Italia working paper uses CPI microdata from nine euro area countries to document consumer price stickiness during the 2021-2024 inflation cycle. The study reveals how price adjustment frequencies responded to the recent inflation surge.
Frequency of price changes surged in 2022
The study, using CPI microdata for nine euro area countries, found that the monthly frequency of price changes reached 12 percent in 2022, a significant increase from the 8 percent average observed between 2010 and 2019.
This frequency then declined rapidly in 2023 and more slowly in 2024, returning close to its pre-pandemic level.
The reduction in price change frequency was more pronounced for food and non-energy industrial goods (NEIG) compared to services, where frequencies remained elevated throughout 2024.
The overall rise in price change frequency was primarily driven by an increase in the number of price increases, rather than a substantial change in the average magnitude of individual price adjustments.
For instance, the average size of price changes (excluding sales) increased from 1.5 percent before 2020 to 5.5 percent in 2022, largely due to the fraction of price changes that were increases rising from two-thirds to 82 percent.
State-dependent pricing steepens Phillips curve
The research provides evidence consistent with state-dependent pricing, where the probability of a price adjustment increases with the gap between actual and optimal prices.
Products with a larger imported-energy cost share exhibited a stronger response to the inflation surge.
Hazard-rate analysis confirms that the likelihood of price adjustments rises as the absolute price gap widens, suggesting a steepening of the Phillips curve during high inflation.
A macro model illustrates the implications of this state dependence, indicating that peak inflation would have been almost 1 percentage point lower had the frequency of price changes not responded to the inflation surge.
This highlights the extensive margin's role in inflation dynamics.
New insights for monetary policy
This study offers crucial new evidence on how consumer prices behave under significant aggregate cost shocks, a departure from prior research focused on low-inflation environments.
The findings strongly support state-dependent pricing models, underscoring that the frequency of price adjustments becomes a key driver of inflation during surges.
For central banks, this implies monetary policy transmission may operate differently when inflation is elevated, demanding a nuanced approach to price stability.