Consumer Price Stickiness in the Euro Area During an Inflation Surge

Frequency of price changes in the euro area (in %)

Non-Technical Summary

Understanding how often and how strongly consumer prices adjust during periods of large cost shocks is key to assessing inflation dynamics and the real effects of monetary policy. While prices are quite sticky when inflation is low (Gautier et al., 2024), less is known about how they adjust in response to large cost shocks. Using detailed micro data underlying the consumer price indices in nine euro area countries, this paper examines how price-setting behaviour changed during the inflation surge between 2021 and 2024. The analysis builds on around 190 million price quotes and provides a consistent comparison with the low and stable inflation period before 2020. 
We find that the frequency of consumer price changes increased significantly during the peak of the inflation surge (Figure 1). On average, the share of prices that changed in a given month rose from around 8% before the pandemic to an average of 12% in 2022, peaking at nearly 16% in January 2023. This increase was driven mainly by more frequent price increases, while the average size of price increases or decreases changed only modestly. As inflation subsided in 2023 and 2024, the frequency of price changes gradually returned to its previous levels, particularly for food and non-energy industrial goods (NEIG). In contrast, the frequency of price changes in services remained higher than the average, consistent with more persistent, wage-related pressures in this sector. 

A key contribution of the paper is to test whether the observed patterns are consistent with predictions of a state-dependent pricing model, under which firms are more likely to change prices in response to larger shocks. The results show that products with a greater share of input costs – particularly energy – showed larger increases in the frequency of price changes. Moreover, hazard-rate evidence indicates that the likelihood of a price change rises with the gap between the actual and the estimated optimal price, both findings consistent with state-dependent adjustment. To further assess the mechanisms behind inflation dynamics, the paper decomposes inflation into two components: how often prices change (extensive margin) and how large those changes are (intensive margin). During the inflation surge, the extensive margin contributes more to inflation variation than it usually does in low-inflation periods, while the intensive margin continues to contribute at a similar level as in low-inflation periods. In a higher-inflation environment, firms increase their prices more frequently, which not only increases the size of price changes (because of a larger share of price increases among price changes) but this also raises the overall frequency of price adjustments. In that case, the slowdown in the frequency of price decreases no longer offsets the rise in the frequency of price increases, as is typical in a low-inflation environment. This latter phenomenon explains why the extensive margin played a larger role in inflation dynamics during the recent inflation surge.

Finally, a macroeconomic model explores what inflation dynamics would have looked like in the absence of this increase in price flexibility. The simulations show that inflation in the euro area would have been up to one percentage point lower at its peak if firms had not increased the frequency of price changes. As the frequency of price changes returned to its long-term levels by late 2024, the episode appears largely temporary in terms of price-setting behaviour, though services still display some persistence. Overall, the study provides a comprehensive picture of how price-setting behaviour adapted during an exceptionally high-inflation episode and adds to the understanding of inflation dynamics in the euro area: when inflation is high, consumer prices become more flexible and respond faster to shocks, making inflation more responsive to monetary policy.
 

Keywords: Price Rigidity, Euro Area, Inflation Surge, Micro Price Data
Codes JEL : E31, E52, F33, L11