Euro area consumer prices showed increased flexibility during inflation surge
A new ECB Working Paper documents how consumer prices in nine euro area countries became more flexible during the 2021-2024 inflation surge. The study finds the frequency of price changes increased significantly, especially for price increases.
Inflation's shifting price dynamics
A new analysis of CPI micro data from nine euro area countries reveals a significant increase in consumer price flexibility during the 2021-2024 inflation cycle.
In 2022, the monthly frequency of price changes reached 12 percent, up from an average of 8 percent in 2010-2019, peaking at nearly 16 percent in January 2023. This surge was primarily driven by a higher frequency of price increases, while the average magnitude of individual price changes remained largely stable.
As inflation subsided in 2023 and 2024, the frequency of price changes gradually returned to pre-pandemic levels, particularly for food and non-energy industrial goods.
However, services prices exhibited more persistent stickiness, with their frequency of change remaining elevated in 2024, consistent with wage-related pressures.
The overall frequency rose mainly because there were more price increases, while the magnitude of the average size of the price increases or decreases changed only marginally during the surge.
State-dependent pricing in action
The study provides evidence consistent with state-dependent pricing models, where firms are more likely to adjust prices in response to larger shocks.
Products with a greater share of imported-energy costs showed a stronger increase in price change frequency.
Hazard-rate analysis indicates that the likelihood of a price change rises with the gap between actual and optimal prices, consistent with state-dependent adjustment and a steepening of the Phillips curve.
To illustrate the impact, a macroeconomic model suggests that peak inflation in the euro area would have been almost one percentage point lower if the frequency of price changes had not increased in response to the inflation surge.
This indicates that consumer prices became more flexible and responsive to shocks during the high-inflation episode, making inflation more responsive to monetary policy.
Inflation's hidden flexibility
This research fundamentally shifts our understanding of price dynamics in high-inflation environments.
It underscores that monetary policy transmission can be more effective when prices are less sticky, offering a new perspective on the recent disinflation.
However, the persistent stickiness in services remains a challenge, suggesting that broad policy tools may face sectoral limitations.