Price Setting in the Euro Area: Some Stylized Facts from Individual Producer Price Data

Abstract

This paper summarizes the microevidence on the setting of producer prices in the euro area. The main findings are: (i) 21% of producer prices are adjusted each month, (ii) producer prices are changed more frequently and by smaller amounts than consumer prices (even after controlling for product characteristics), (iii) price decreases are relatively frequent, (iv) inflation correlates positively with the difference between the frequency of price increases and decreases, and (v) there is substantial variation in price flexibility across sectors, which can be explained in part by differences in the cost structure, the degree of competition, and the level of sectoral inflation.

Microdata Evidence on the Empirical Importance of Selection Effects in Menu‐Cost Models

“…Interestingly, the mode of the monthly price‐change distribution reported by Vermeulen et al. () (0.09) is close to what is reported above for the average monthly price‐change frequency (0.08) although, once more, the distribution shows outliers with a very high frequency of price changes.…”

“…Vermeulen et al. () also report a substantial degree of heterogeneity across sectors when studying price‐setting behavior on monthly microdata on producer prices for six European countries. Interestingly, the mode of the monthly price‐change distribution reported by Vermeulen et al.…”

How Rigid are Producer Prices?

“…The second column reports the weighted mean of our finished goods and services PPI data, indicating that roughly one of every five price changes is less than 1 percent, 30 percent are less than 2.5 percent, and 40 percent are less than 5 percent. These numbers appear roughly comparable to those for the CPI, though with a somewhat higher share of price changes under 1 percent in the PPI than in the CPI, and to those for the euro area, for which Vermeulen et al (2007) report that about one quarter of producer price changes are less than 1 percent.…”

Optimal inflation rates with the trending relative price of investment

“…On the one hand, this assumption is consistent with the view of Carlstrom and Fuerst (2010) because the structure investment includes more than 95 percent of residential investment. On the other hand, this assumption is consistent with the micro-evidence of Nakamura and Steinsson (2008) and Vermeulen et al (2012): the producer prices of capital and durable goods such as machinery, equipment, and furniture are highly sticky.…”

“…According to Nakamura and Steinsson (2008), a median implied duration of prices of finished producer goods for the U.S. is 8.7 months and some categories exhibit an even higher duration: 26.5 months for machinery and equipment and 19.1 months for furniture and household durables. 3 Similarly, for the euro area, a median implied duration of prices is 9.5 months for durable products and 10.6 months for capital goods according to Vermeulen et al (2012). These evidences, although not conclusive, suggest that prices in an I-sector are somewhat sticky.…”