Lukas Henkel
- 24 April 2024
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 3, 2024Details
- Abstract
- The pricing decisions of firms are a key determinant of inflation. To understand inflation dynamics, it is necessary to analyse how often and by how much individual prices change. This article discusses what micro price data gathered by the European System of Central Banks’ Price-setting Microdata Analysis Network (PRISMA) tell us about the way firms set their prices. The results point to state dependence in pricing, whereby firms change prices more frequently following large shocks. This also affects the transmission of monetary policy. Evidence from recent microdata as at the end of 2023 suggests that, after an increase in the frequency of price changes following the unusually large shocks experienced since 2020, price changes in the euro area are starting to behave in a more similar way to the pre-pandemic period.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 17 July 2023
- OCCASIONAL PAPER SERIES - No. 324Details
- Abstract
- The coronavirus (COVID-19) pandemic caused a deep recession globally, as well as in the euro area, accompanied by a steep decline in inflation rates in 2020. This paper reviews some of the main challenges created by the pandemic for inflation measurement and provides micro price data analysis of how price setting has reacted to the strong COVID-19 shock. For this purpose, we use three different, but complementary, microdata sources for specific countries and sectors: micro price data underlying the official consumer price indices in Germany, Italy, Latvia and Slovakia; (scanner) data from German and Italian supermarkets; and online (web-scraped) prices for Poland. A common finding of the micro price studies in this paper is that state dependence significantly contributed to the price-setting response to the COVID-19 shock. Nevertheless, the extent and degree of responses varies widely by sector and even country, also depending on the severity of the pandemic situation.
- JEL Code
- D4 : Microeconomics→Market Structure and Pricing
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
- 17 July 2023
- OCCASIONAL PAPER SERIES - No. 321Details
- Abstract
- This paper analyses the implications of the evidence on micro price setting gathered by Price-setting Microdata Analysis Network (PRISMA) for inflation dynamics and monetary policy, relying on calibrated models and direct empirical evidence. According to models calibrated to the euro area micro evidence in Gautier et al. (2022, 2023), infrequent price changes and moderate state dependence in price setting should result in a meaningful Phillips curve in the euro area. Empirical estimates of the Phillips curve during the low-inflation period confirm previous findings of a relatively flat but stable slope. This estimated flat slope reflects both infrequent and subdued price adjustment in response to aggregate shocks, i.e. the presence of nominal and real rigidities. Model-based simulations show that, due to non-linearities in price setting, changes in trend inflation above 5-6% would have significant effects on the euro area Phillips curve. Similarly, shocks to nominal costs larger than 15% would result in non-linear effects on inflation dynamics in calibrated models. In line with these simulations, recent micro evidence suggests that the return of higher and more volatile inflation seems to be associated with higher frequencies of price changes, mainly because the frequency of price increases rises with the level and volatility of inflation.
- JEL Code
- E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
- 17 July 2023
- OCCASIONAL PAPER SERIES - No. 320Details
- Abstract
- E-commerce has become more prevalent throughout Europe in the last decade. The coronavirus (COVID-19) pandemic accelerated this trend, particularly in the retail sector. This paper focuses on the implications of increasing business-to-consumer e-commerce for prices and inflation in the euro area. It highlights three key results. First, whether online prices and inflation are higher or lower than their offline counterparts depends on the distribution model, the sector and the country. Moreover, properly selected online prices track official inflation indices even in real time. Second, the effect of e-commerce on inflation appears to be transient and differs between countries. However, as the penetration of some markets is still low, these transitory effects will likely persist at the euro area level for several years. Third, online prices change more frequently than offline prices. This might lead to greater price flexibility overall as online trade gains market share in a growing number of sectors.
- JEL Code
- D4 : Microeconomics→Market Structure and Pricing
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
L11 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Production, Pricing, and Market Structure, Size Distribution of Firms
- 9 November 2022
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 7, 2022Details
- Abstract
- This box examines the impact of the recent rise in inflation on low-income households in the euro area. Low-income households face significantly higher effective inflation rates than high-income households, due to a different composition of their consumption basket. Moreover, they are more liquidity-constrained and have less room to buffer sharp increases in their cost of living. Survey-based evidence shows that low-income households perceive the recent government measures aimed at easing the burden of higher energy prices as less adequate than high-income households do. This could suggest that there is potential for government support measures to be more targeted towards low-income households.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
- 21 September 2021
- OCCASIONAL PAPER SERIES - No. 265Details
- Abstract
- This paper – which takes into consideration overall experience with the Harmonised Index of Consumer Prices (HICP) as well as the improvements made to this measure of inflation since 2003 – finds that the HICP continues to fulfil the prerequisites for the index underlying the ECB’s definition of price stability. Nonetheless, there is scope for enhancing the HICP, especially by including owner-occupied housing (OOH) using the net acquisitions approach. Filling this long-standing gap is of utmost importance to increase the coverage and cross-country comparability of the HICP. In addition to integrating OOH into the HICP, further improvements would be welcome in harmonisation, especially regarding the treatment of product replacement and quality adjustment. Such measures may also help reduce the measurement bias that still exists in the HICP. Overall, a knowledge gap concerning the exact size of the measurement bias of the HICP remains, which calls for further research. More generally, the paper also finds that auxiliary inflation measures can play an important role in the ECB’s economic and monetary analyses. This applies not only to analytical series including OOH, but also to measures of underlying inflation or a cost of living index.
- JEL Code
- C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation
C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection
C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 25 March 2021
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 2, 2021Details
- Abstract
- The coronavirus (COVID-19) pandemic triggered significant changes in household spending in 2020. These shifts are reflected in the 2021 HICP weights, and consequently, also in measured annual inflation. The impact of these new HICP weights on annual inflation is not insignificant and is also heterogenous across countries. Looking ahead, the full impact will most likely only materialise over the course of the year as the relative prices gradually change.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
- 25 March 2021
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 2, 2021Details
- Abstract
- This box compares the economic performance of the euro area and the United States during 2020. While it is not yet possible to assess the long-term impact of the coronavirus (COVID-19) pandemic, it is interesting to take stock of the economic developments that have led to the worst loss in output in either region since the Second World War. Primarily as a result of the stricter pandemic-related lockdowns in the euro area, total GDP losses for 2020 somewhat exceeded those in the United States. Nevertheless, the pattern in private consumption was similar in both economies despite the considerably larger fiscal transfers provided in response to the crisis in the United States. Job retention schemes, which cushioned the significant adverse impact of the crisis on employment, and other direct transfers to firms and households have been key elements of the euro area’s fiscal support. Inflation was more subdued in the euro area, partly on account of special factors like the temporary reduction in German VAT.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
J82 : Labor and Demographic Economics→Labor Standards: National and International→Labor Force Composition
- 2 October 2020
- WORKING PAPER SERIES - No. 2473Details
- Abstract
- This paper studies the role of sticky prices for the monetary transmission mechanism, using disaggregated industry-level data from 205 US industries. There is substantial heterogeneity in the output responses of industries to monetary policy surprises. I show that an industry's response to monetary policy surprises is systematically related to an industry's degree of price stickiness as measured by the average frequency of price adjustment. The size of the differential reaction is economically large and statistically significant. The results suggest that sticky prices play an important role in the transmission of monetary policy, consistent with New Keynesian macroeconomic models. This result is robust to the inclusion of further industry-level control variables.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
- 5 February 2019
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 1, 2019Details
- Abstract
- For two decades the ECB Survey of Professional Forecasters (SPF) has been collecting point forecasts and probability distributions for euro area-wide HICP inflation, real GDP growth and the unemployment rate at different horizons. This article documents the evolution of the SPF through the changing economic landscape of the past twenty years, including the Great Moderation, with relatively high economic growth and stable inflation, the financial crisis and, more recently, a prolonged period of subdued inflationary pressures. Analyses show that the strong and persistent shocks in the past ten years have created challenges for the stability of the economic relationships and mean reversion tendencies on which forecasts tend to be based. They also suggest that in 2009 there was a lasting increase in forecasters’ assessments of uncertainty across all variables and horizons. Learning from the SPF has remained a useful input for the ECB’s economic analysis and monetary policy.
- JEL Code
- D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications