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Price-setting Microdata Analysis Network (PRISMA)

The Price-setting Microdata Analysis Network (PRISMA) was set up in 2018 by the European System of Central Banks (ESCB) to deepen the understanding of price-setting behaviour and inflation dynamics in the EU, with a view to gaining new insights into a key element of monetary policy transmission. To this end, PRISMA collects and studies various kinds of microdata, including data underlying official price indices such as the Consumer Price Index (CPI) and the Producer Price Index (PPI), scanner data and online prices.

General purpose

Modern monetary macroeconomics relies on the assumption of price stickiness, i.e. that prices do not immediately adjust to costs and demand. In standard models, price stickiness is the ultimate reason why monetary impulses affect real activity and are transmitted slowly through the economy.

Understanding the degree of price stickiness and inflation persistence is important for central banks as these determine how interest rates should be set to achieve the desired level of inflation. However, the exact nature of price stickiness and the mechanisms that are at its core are still not perfectly understood. There are two key reasons to investigate price setting using microdata rather than macrodata:

  • microdata help us understand how the behaviours of price setters aggregate to determine inflation over the business cycle
  • macrodata do not contain enough information to distinguish between different underlying mechanisms

The Eurosystem has previously organised large-scale research projects to better understand price dynamics and price setting at the micro level, such as the Eurosystem’s Inflation Persistence Network (IPN). Although much has been learned from earlier research efforts, gaps in our knowledge remain. Since the completion of the IPN project:

  • the euro area has experienced a financial crisis and a period of persistently low inflation
  • new data sources have become available (e.g. scanner data, web-scraped data)

The aim of PRISMA network is to address these challenges. For details, please consult the sections on Research in progress and Data.

Main fields of study

The PRISMA network focuses on two broad policy-relevant areas:

  1. Monetary policy implications of micro price adjustment

    • What are the relevant features of price setting in EU countries? How do they compare with those in the United States? Have they changed in the low-inflation environment?
    • What is the most relevant measure of price rigidity for monetary policy? Does state-dependent pricing/selection affect monetary policy transmission? Do sales (and product replacement) matter for monetary policy?
    • What are the drivers of sectoral heterogeneity in price setting? Do they matter for monetary policy? What are the origins of price rigidity along the production chain and how does producer price rigidity translate into consumer price rigidity?
    • Can variation in price stickiness account for non-linearities and state dependence in the Phillips curve?
    • What can microdata teach us about welfare-relevant underlying inflation?
    • How does price dispersion within and across EU countries evolve over time? Are patterns similar to those in the United States?
  2. Inflation measurement and nowcasting

    • Features of product substitution (trading up/down) over the business cycle by households. How do substitution bias and product replacement affect inflation measurement?
    • Nowcasting inflation and its components using online prices.
    • How heterogeneous are inflation rates across households?
    • How do online prices (web-scraped data) compare with offline prices (micro CPI, scanner data)?
Data

The PRISMA network analyses multiple types of data to meet its objectives:

  1. Microdata underlying the Consumer Price Index

    • Cover a wide portion of the consumption basket (goods and services).
    • Contain monthly consumer price quotes of narrow product categories from a sample of stores in each region of a country.
  2. Microdata underlying the Producer Price Index

    • Typically cover industrial goods and services (and in many cases the agricultural sector).
    • Contain reported monthly prices observed at the first commercialisation stage without transport costs, commercialisation costs or value added tax.
  3. Scanner data

    • Contain both prices and quantities of products identified at the barcode level. There are two types of scanner data:
      • store scanner (IRi): weekly unit prices and quantities sold at the store level
      • household scanner (GfK/Kantar): purchases (transaction prices and quantities) by individual households
  4. Web-scraped price data (in progress)

    • Consumer prices scraped from websites.
    • Data available in real-time covering a wide variety of goods and services.
Organisation

Organisers

  • Luca Dedola, Senior Adviser in the ECB’s Directorate General Research
  • Chiara Osbat, Adviser in the ECB’s Directorate General Economics, Prices and Costs Division
  • Péter Karádi, Lead Economist in the ECB’s Directorate General Research, Monetary Policy Research Division
  • Georg Strasser, Principal Economist in the ECB’s Directorate General Research, Monetary Policy Research Division

Members

Country Member Institution
AT Fabio Rumler Oesterreichische Nationalbank
AT Christian Beer Oesterreichische Nationalbank
AT Teresa Messner Oesterreichische Nationalbank
BE Catherine Fuss Nationale Bank van België/Banque Nationale de Belgique
BE Helene Zimmer Nationale Bank van België/Banque Nationale de Belgique
BE Riemer Faber Nationale Bank van België/Banque Nationale de Belgique
CZ Jan Babecký Česká národní banka
CZ Jan Šolc Česká národní banka
DE Sebastian Weinand Deutsche Bundesbank
DE Elisabeth Wieland Deutsche Bundesbank
DE Jan-Oliver Menz Deutsche Bundesbank
ECB Lukas Henkel European Central Bank
ECB Anton Nakov European Central Bank
ECB Riccardo Trezzi European Central Bank
ECB Henning Weber European Central Bank
ECB Omiros Kouvavas European Central Bank
ECB David Wittekopf European Central Bank
ECB Timo Reinelt European Central Bank
ECB Sergio Santoro European Central Bank
EE Lenno Uusküla Eesti Pank
ES Luis J. Álvarez Banco de España
FR Herve Le Bihan Banque de France
FR Nicoletta Berardi Banque de France
FR Erwan Gautier Banque de France
GR Theodora Kosma Bank of Greece
GR Pavlos Petroulas Bank of Greece
IT Giordano Zevi Banca d'Italia
IT Cristina Conflitti Banca d'Italia
IT Marianna Riggi Banca d'Italia
IT Alex Tagliabracci Banca d'Italia
LT Valentin Jouvenceau Lietuvos bankas
LU Thomas Mathä Banque centrale du Luxembourg
LU Ladislav Wintr Banque centrale du Luxembourg
LV Ludmila Fadejeva Latvijas Banka
LV Boriss Siliverstovs Latvijas Banka
NL Irina Stanga De Nederlandsche Bank
NL Emmanuel de Veirman De Nederlandsche Bank
NO Vegard Larsen Norges Bank
PL Paweł Macias Narodowy Bank Polski
PL Damian Stelmasiak Narodowy Bank Polski
PT Domingos Seward Banco de Portugal
PT Fernando Martins Banco de Portugal
RO Dinu Barnea Banca Naţională a României
SK Brian Fabo Národná banka Slovenska
SE Mathias Klein Sveriges Riksbank

Research assistants

  • Juergen Amann (2019/2020)
  • Regina Kiss (2019/2020)
  • Federico Rodari (2019/2020)
  • Javier Sánchez Bachiller (2019/2021)
  • Gonzalo Ares de Parga Regalado (2020/2021)
  • Gian Pietro Bellocca (2020/2021)
  • Luca Conti (2020)
  • Karim El-Ouaghlidi (2020/2021)
  • Alberto Lentini (2020/2021)
  • Pascal Seiler (2020/2021)
  • Ivan Borna Brcina (2021)
Research in progress

“Price setting in supermarkets on the two sides of the Atlantic”

Péter Karádi (European Central Bank), Juergen Amann (University of Nottingham) and Javier Sánchez Bachiller (European Central Bank)

This paper uses store-level supermarket scanner data from the United States and four euro area countries (Germany, the Netherlands, France and Italy) to compare and contrast price-setting practices across countries. First, the paper documents the features of the underlying data recently acquired by the ECB in the context of the PRISMA network. Second, it documents the frequency of posted, regular and reference prices across the different jurisdictions using the same sales-filtering mechanism for baskets of goods that are heterogeneous across countries and for a homogeneous subgroup. Third, it analyses the relative significance of time-dependent and state-dependent factors across countries in price setting.

“Measuring price selection in microdata – it’s not there”

Péter Karádi (European Central Bank), Raphael Schoenle (Brandeis University and FRB Cleveland) and Jesse Wursten (KU Leuven)

We use microdata to estimate the strength of price selection – a key metric for the effect of monetary policy on the real economy. We find that price adjustment pressure at the product level does not significantly influence the probability of price adjustment in response to identified monetary and credit shocks, suggesting price selection is absent. This happens even though prices do respond significantly both to aggregate shocks and product-level adjustment pressure directly. Our results are broadly consistent with second-generation state-dependent pricing models and sizable effects of monetary policy on the real economy.

“Assessing the degree of and changes in price rigidity in the euro area: novel insights from CPI microdata”

Erwan Gautier (Banque de France), Cristina Conflitti (Banca d’Italia), Jan-Oliver Menz (Deutsche Bundesbank), Teresa Messner (Oesterreichische Nationalbank), Fabio Rumler (Oesterreichische Nationalbank), Sergio Santoro (Banda d’Italia), Elisabeth Wieland (Deutsche Bundesbank) and Helene Zimmer (Nationale Bank van België/Banque Nationale de Belgique)

This paper presents stylised facts on the degree of and changes in price rigidity in the euro area. For this purpose, we use new releases of CPI micro prices for eight euro area countries. The rich dataset allows us to analyse the frequency, size and distribution of monthly price changes from both a cross-sectoral and a time-series perspective. Early results confirm that CPI price changes are infrequent, that differences across sectors are larger than across countries, and that about two-thirds of price changes are price increases. Moreover, our results suggest a prominent role of sales and promotions in the frequency of price changes. Comparing our results with a similar exercise by Dhyne et al. (2006), we find that in most countries the frequency of price changes has increased.

“Nowcasting inflation with daily price data”

Jan-Oliver Menz and Elisabeth Wieland (both Deutsche Bundesbank)

For central banks, nowcasting plays a crucial role in tracking inflation dynamics in real time, particularly in times of high economic uncertainty such as the recent coronavirus (COVID-19) pandemic. In light of the rising market share of e-commerce, a whole universe of digital information is provided by (web-scraped) online prices, which can be tracked at a daily (or even higher) frequency, in contrast to the monthly frequency of the traditional consumer price indices compiled by national statistical institutes. The question is whether this daily information can help in nowcasting the inflation rate. This paper applies correlation analysis and a MIDAS regression approach to assess the forecasting properties of daily online price data for Germany and the euro area.

“Forecasting inflation with big data: do machine learning techniques help?”

Mario Porqueddu, Chiara Osbat, Gerhard Rünstler and Justus Meyer (all European Central Bank)

We look at the additional advantage that mixing macrodata with very granular high-frequency data brings to forecasting inflation at various horizons.

“Price-setting behaviour in Germany: What has happened since the introduction of the euro?”

Jan-Oliver Menz and Elisabeth Wieland (both Deutsche Bundesbank)

In 2005 the Deutsche Bundesbank presented first results on price flexibility and inflation persistence in Germany based on CPI micro price data. Using a novel database covering more than 80% of the CPI and almost the entire period since the introduction of the euro, we take a new look at price setting in Germany. The depth of the dataset allows us to investigate structural changes in price setting over time, looking at pricing strategies across different types of goods as well as different outlet types, such as supermarkets, discounters and online shops.

“Online vs. offline prices: evidence from German CPI microdata”

Ana-Maria Dumitru and Elisabeth Wieland (both Deutsche Bundesbank)

Using monthly German micro price data, we analyse differences in the price setting of online and offline retailers by exploiting information from the official CPI weighting scheme by outlet type. Data are available for the State of Hessen for the period 2015-2019 and cover roughly 500,000 price quotes per year, mostly for processed food items and industrial goods. Prices from online stores make up about one-fifth of the data. We find that food products and recreational services experience more frequent price changes in the offline environment, with shorter average price duration than online products. By contrast, we find shorter price durations for all industrial goods traded online. In addition, offline products and services for the majority of goods show more extreme mean and median price changes than their online counterparts. When we confine the set of offline products to only those that are also traded online, both frequencies of price changes and price durations tend to converge in the two trading environments. Nevertheless, for industrial goods, price rigidity in the offline environment is higher and price changes are somewhat more extreme than in the online environment.

“The intensive and extensive margin of price adjustment to cost shocks: evidence from Danish multiproduct firms”

Luca Dedola (European Central Bank), Mark S. Kristoffersen (Fagbevægelsens Hovedorganisation) and Gabriel Zuellig (Danmarks Nationalbank)

This paper studies price adjustment in a novel monthly dataset of individual product prices of multiproduct firms, merged with firm-level balance sheet and cost data. According to theoretical literature on price setting, the interdependence between the decision on whether or not to change prices (the extensive margin) and the actual amount by which prices change (the intensive margin) contributes to determining the real effects of monetary policy. We estimate the adjustment of prices to shocks to firm-level import costs and energy costs (due to oil supply shocks) along extensive and intensive margins, modelling them jointly to address endogenous selection bias due to state-dependent pricing.

“Pass through of corporate taxes to individual firm prices in Germany”

Luca Dedola (European Central Bank), Chiara Osbat (European Central Bank) and Timo Reinelt (European Central Bank and University of Mannheim)

We estimate the response of prices to changes in corporate tax rates (pass-through). For this, we use variations in corporate tax rates across time and location. In Germany, corporate tax rates are set at the municipal level once a year. Each year between 2012 and 2017 about 13% of all municipalities changed their local tax rate. We leverage this fine-grained local variation in tax rates to provide estimates of pass-through that control for macroeconomic conditions. Our study is similar to Baker, Sun and Yanellis (2018), who looked at the variation in tax rates across US states. We find that the pass-through of corporate taxes to prices is about 50%. However, there is significant heterogeneity: in markets with high market concentration, pass-through tends to be 100%, while it is not significantly different from zero in less concentrated markets.

“Price dispersion in Germany and implications for the pass-through of shocks”

Lukas Henkel, Chiara Osbat and Chiara Perillo (all European Central Bank)

We look at price dispersion across German supermarkets at the individual product level and relate it to goods and local characteristics. We then analyse whether the pass-through of idiosyncratic and common shocks is affected by the uniformity or non-uniformity of prices.

“Product quality, measured inflation and monetary policy”

Alexander Rodnyansky (University of Cambridge), Alejandro Van der Ghote (European Central Bank) and Daniel Wales (University of Cambridge)

We propose a theoretical model with endogenous quality adjustment which nests the canonical New Keynesian model. In this framework, endogenous quality choice implies a smaller slope than the traditional New Keynesian Phillips curve and amplifies the economy’s response to productivity shocks. In a positive sense, this leads to less reactionary monetary policy where model misspecification matters more than data with poor quality adjustments. In a normative sense, optimal monetary policy is unchanged, as these extensions to the standard New Keynesian model preserve divine coincidence.

“Control costs, rational inattention, and retail price dynamics”

James Costain (Banco de España) and Anton Nakov (European Central Bank)

This paper models the adjustment of regular and sales prices in retail microdata under the assumption that precise decision-making is costly. We build on two related approaches: “control costs” and “rational inattention”. We adapt and extend the equivalence results of Steiner et al. (2017) to the retail pricing context in order to build a tractable control cost model that approximates the solution of the rational inattention model. We calibrate the approximate rational inattention model to microdata from supermarkets to study retail price dynamics. Using our simulated model to diagnose the roles of stochastic price discrimination versus the inherent discreteness of the rational inattention solution as drivers of retail prices, we find that the former helps explain the “jumpiness” of retail sales, while the latter helps explain the “stickiness” of nominal price points. Our model also suggests that limited memory, in addition to limited information processing capability, may play a role in nominal rigidity.

“Price dispersion in Europe”

Nicoletta Berardi (Banque de France) and Georg Strasser (European Central Bank)

This paper examines the nature, evolution and sources of price dispersion within European countries. We compare price dispersion across a large set of European countries and explain their differences.

“Inflation heterogeneity in Europe”

Regina Kiss (University of Vienna) and Georg Strasser (European Central Bank)

This paper studies the nature, evolution and sources of inflation differences between households in Europe. We compare this inflation heterogeneity with recent findings for the United States (Kaplan and Schulhofer-Wohl, 2017).

Conferences
  1. 2019 - Session on price setting at the 2019 annual Central Bank Research Association (CEBRA) conference
  2. 2020 - CEBRA session on price setting at the 2020 meeting of the American Economic Association
  3. 2020 - Poster session at the 2020 annual CEBRA conference
  4. 2021 October - Federal Reserve Bank of Cleveland/ECB Inflation conference