Working Paper Series no. 136: Price Setting in the Euro Area: Some Stylized Facts from Individual Consumer Price Data

Abstract

This paper documents patterns of price setting at the retail level in the euro area. A set of stylized facts on the frequency and size of price changes is presented along with an econometric investigation of their main determinants. Price adjustment in the euro area can be summarized in six stylized facts. First, prices of most products change rarely. The average monthly frequency of price adjustment is 15 p.c., compared to about 25 p.c. in the US. Second, the frequency of price changes is characterized by substantial cross-product heterogeneity and pronounced sectoral patterns: prices of (oil-related) energy and unprocessed food products change very often, while price adjustments are less frequent for processed food products, non-energy industrial goods and services. Third, cross-country heterogeneity exists but is less pronounced. Fourth, price decreases are not uncommon. Fifth, price increases and decreases are sizeable compared to aggregate and sectoral inflation rates. Sixth, price changes are not highly synchronized across price-setters. Moreover, the frequency of price changes in the euro area is related to a number of factors, in particular seasonality, outlet type, indirect taxation, use of attractive prices as well as aggregate or product-specific inflation.

Emmanuel Dhyne, Luis J. Álvarez, Hervé Le Bihan, Giovanni Veronese, Daniel Dias, Johannes Hoffmann, Nicole Jonker, Patrick Lünnemann, Fabio Rumler, Jouko Vilmunen
November 2005

Classification JEL : E31, D40, C25.

Keywords : Price-setting, consumer price, frequency of price change.