European Central Bank - eurosystem
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Fabio Rumler

26 January 2024
WORKING PAPER SERIES - No. 2894
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Abstract
It has been widely documented that households experience different inflation rates which are generally concealed in aggregate price indices. Using scanner data from a large household panel for Austria, we analyse price dynamics faced by individual households and try to explain the causes for the observed inflation differences. Considering not only consumption shares but also the specific product prices paid by households, we find a considerable and persistent degree of heterogeneity among household inflation rates. These are also quite variable over time, resulting from varying consumption baskets and active product substitution, allowing households to reduce their inflation exposure substantially. Factors like age and shopping behavior of households explain some of the inflation differences, whereas income does not seem to have a notable influence in normal times. However, during high inflation periods, the lowest income group is found to face higher inflation rates than other income groups.
JEL Code
D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis
D30 : Microeconomics→Distribution→General
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
Network
Price-setting Microdata Analysis Network (PRISMA)
17 July 2023
OCCASIONAL PAPER SERIES - No. 325
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Abstract
Inflation affects the purchasing power of households. This paper documents large, idiosyncratic inflation differences between households in their everyday shopping. Low-income households have experienced higher inflation in the last ten years, but the difference to richer households has been small and time varying. Household-specific behaviour appears to dominate inflation differences within countries. Between countries, multinational retail chains not only differentiate products by branding, but also charge different prices for identical products. Retailers continue to differentiate prices along national borders, even within largely integrated economic regions. Price changes, however, are broadly aligned across borders within the same retailers.
JEL Code
D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis
D3 : Microeconomics→Distribution
D43 : Microeconomics→Market Structure and Pricing→Oligopoly and Other Forms of Market Imperfection
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
F15 : International Economics→Trade→Economic Integration
F4 : International Economics→Macroeconomic Aspects of International Trade and Finance
17 July 2023
OCCASIONAL PAPER SERIES - No. 323
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Abstract
This paper provides an extensive literature review and analyses some open issues in the measurement of inflation that can only be explored in depth using micro price data. It builds on the analysis done in the context of the ECB’s strategy review, which pointed at directions for improvement of the Harmonised Index of Consumer Prices (HICP), including better quantification of potential biases. Two such biases are the substitution bias and the quality adjustment bias. Most analyses of substitution bias rest on the concept of the cost of living, positing that preferences are stable, homogeneous and homothetic. Consumer behaviour is characterised by preference shifts and heterogeneity, which influence the measurement of the cost of living and substitution bias. Climate change may make the impact of preference shifts particularly relevant as it causes the introduction of new varieties of “green” goods and services (zero-kilometre food, sustainable tourism) and a shift from “brown” to “green” products. Furthermore, PRISMA data show that consumption baskets and thus inflation vary across income classes (e.g. higher-income households tend to buy more expensive goods), pointing to non-homotheticity of preferences. When preferences are heterogeneous and/or non-homothetic, it is important to monitor different experiences of inflation across classes of consumers/citizens. This is particularly important when very large relative price changes affect items that enter the consumption baskets of the rich and the poor, the young and the old, in very different proportions. Another open area of analysis concerns the impact of quality adjustment on measured inflation. Evidence based on web-scraped prices shows that the various implicit quality adjustment methods can produce widely varying inflation trends when product churn is fast. In the euro area specifically, using different quality adjustment methods can be an overlooked source of divergent inflation trends in sub-categories, and, if pervasive, shows up in overall measured inflation divergence across countries.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
17 July 2023
OCCASIONAL PAPER SERIES - No. 319
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Abstract
This paper documents five stylised facts relating to price adjustment in the euro area, using various micro price datasets collected in a period with relatively low and stable inflation. First, price changes are infrequent in the core sectors. On average, 12% of consumer prices change each month, falling to 8.5% when sales prices are excluded. The frequency of producer price adjustment is greater (25%), reflecting that the prices of intermediate goods and energy are more flexible. For both consumer and producer prices, cross-sectoral heterogeneity is more pronounced than cross-country heterogeneity. Second, price changes tend to be large and heterogeneous. For consumer prices, the typical absolute price change is about 10%, and the distribution of price changes shows a broad dispersion. For producer prices, the typical absolute price change is smaller, but nevertheless larger than inflation. Third, price setting is mildly state-dependent: the probability of price adjustment rises with the size of price misalignment, mainly reflecting idiosyncratic shocks, but it does not increase very sharply. Fourth, for both consumer and producer prices, the repricing rate showed no trend in the period 2005-19 but was more volatile in the short run. Fifth, small cyclical variations in frequency did not contribute much to fluctuations in aggregate inflation, which instead mainly reflected shifts in the average size of price changes. Consistent with idiosyncratic shocks as the main driver of price changes, aggregate disturbances affected inflation by shifting the relative number of firms increasing or decreasing their prices, rather than the size of price increases and decreases.
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
20 April 2023
RESEARCH BULLETIN - No. 106
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Abstract
(Why) do prices and inflation rates differ within the euro area? We study the relevance of a national border for grocery prices in the otherwise homogenous and highly integrated border region between Austria and Germany. Using transaction data on prices and quantities from a large household panel survey, we compare the prices of identical products within a narrow band along the border. We find large assortment and price differences between the two countries. Even within multinational retail chains the prices of identical products on each side of the border differ on average by about 21%. These price differences are not very persistent, indicating little arbitrage gain from undifferentiated cross-border shopping. Product-level inflation rates differ for only half of the retail chains. Our results highlight the importance of the historical evolution of distribution networks and of the structure of the sales organisation as a driver of price and inflation heterogeneity.
JEL Code
D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D43 : Microeconomics→Market Structure and Pricing→Oligopoly and Other Forms of Market Imperfection
F15 : International Economics→Trade→Economic Integration
F4 : International Economics→Macroeconomic Aspects of International Trade and Finance
8 February 2023
WORKING PAPER SERIES - No. 2776
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Abstract
(Why) do prices and inflation rates differ within the euro area? We study the relevance of a national border for grocery prices in the otherwise homogenous and highly integrated border region of Austria and Germany. Using transaction data on prices and quantities from a large household panel, we compare the prices of identical products within a narrow band along the border. We find large assortment and price differences between these two regions. Even within multinational retail chains the prices of identical products on the two sides of the border differ on average by about 21%. These price differences are not very persistent indicating little arbitrage gain from undifferentiated cross-border shopping. Ensuing product-level inflation rates differ for only half of the chains. The results highlight the importance of the history-dependent evolution of distribution networks and of the structure of the sales organization as a driver of price and inflation heterogeneity.
JEL Code
D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D43 : Microeconomics→Market Structure and Pricing→Oligopoly and Other Forms of Market Imperfection
F15 : International Economics→Trade→Economic Integration
F4 : International Economics→Macroeconomic Aspects of International Trade and Finance
Network
Price-setting Microdata Analysis Network (PRISMA)
17 June 2022
WORKING PAPER SERIES - No. 2669
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Abstract
Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks.
JEL Code
D40 : Microeconomics→Market Structure and Pricing→General
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
Network
Price-setting Microdata Analysis Network (PRISMA)
21 September 2021
OCCASIONAL PAPER SERIES - No. 265
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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
28 November 2014
WORKING PAPER SERIES - No. 1742
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Abstract
Using a comprehensive data set on retail prices across the euro area, we analyse within- and cross-country price dispersion in European countries. First, we study price dispersion over time, by investigating the time-series evolution of the coefficient of variation, calculated from price levels. Second, since we find that cross-sectional price dispersion by far dominates price dispersion over time, we study price dispersion across space and investigate the role of geographical barriers (distance and national borders). We find that (i) prices move together more closely in locations that are closer to each other; (ii) cross-country price dispersion is by an order of magnitude larger than within-country price dispersion, even after controlling for product heterogeneity; (iii) a large part of cross- country price differences can be explained by different tax rates, income levels and consumption intensities. In addition, we find some indication that price dispersion in the euro area has declined since the inception of the Monetary Union.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
Network
Nielsen Disaggregated Price Dataset
12 February 2009
WORKING PAPER SERIES - No. 1005
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Abstract
In this paper we analyse empirically how labour market institutions influence business cycle volatility in a sample of 20 OECD countries. Our results suggest that countries characterized by high union density tend to experience more volatile movements in output, whereas the degree of coordination of the wage bargaining system and strictness of employment protection legislation appear to play a limited role for output volatility. We also find some evidence suggesting that highly coordinated wage bargaining systems have a dampening impact on inflation volatility.
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
Network
Wage dynamics network
18 August 2006
WORKING PAPER SERIES - No. 669
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Abstract
We ask why, in many circumstances and many environments, decision-makers choose to act on a time-regular basis (e.g. adjust every six weeks) or on a state-regular basis (e.g. set prices ending in a 9), even though such an approach appears suboptimal. The paper attributes regular behaviour to adjustment cost heterogeneity. We show that, given the cost heterogeneity, the likelihood of adopting regular policies depends on the shape of the benefit function: the flatter it is, the more likely, ceteris paribus, is regular adjustment. We provide sufficient conditions under which, when policymakers differ with respect to the shape of the benefit function (as in Konieczny and Skrzypacz, 2006), the frequency of adjustments across markets is negatively correlated with the incidence of regular adjustments. On the other hand, if policymakers differences are due to the level of adjustment costs (as in Dotsey, King and Wolman, 1999), then the correlation is positive. To test the model we apply it to optimal pricing policies. We use a large Austrian data set, which consists of the direct price information collected by the statistical office and covers 80% of the CPI over eight years. We run cross-sectional tests, regressing the proportion of attractive prices and, separately, the excess proportion of price changes at the beginning of a year and at the beginning of a quarter, on various conditional frequencies of adjustment, inflation and its variability, dummies for good types, and other relevant variables. We find that the lower is, in a given market, the conditional frequency of price changes, the higher is the incidence of time- and state-regular adjustment.
JEL Code
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
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
D01 : Microeconomics→General→Microeconomic Behavior: Underlying Principles
Network
Eurosystem inflation persistence network
14 September 2005
WORKING PAPER SERIES - No. 524
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Abstract
This paper documents patterns of price setting at the retail level in the euro area, summarized in six stylized facts. First, the average euro area 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 - prices of oil and unprocessed food products change very often, while price adjustments are less frequent for processed food, 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 retailers. Moreover, the frequency of price changes in the euro area is related to several factors, such as seasonality, outlet type, indirect taxation, pricing practices as well as aggregate or product specific inflation.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D40 : Microeconomics→Market Structure and Pricing→General
C25 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Discrete Regression and Qualitative Choice Models, Discrete Regressors, Proportions
Network
Eurosystem inflation persistence network
Annexes
14 September 2005
WORKING PAPER SERIES - No. 523
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Abstract
Based on individual price records collected for the computation of the Austrian CPI, average frequencies of price changes and durations of price spells are estimated to characterize price setting in Austria. Depending on the estimation method, prices are unchanged for 10 to 14 months on average. We find strong heterogeneity across sectors and products. Price increases occur only slightly more often than price decreases. The typical size of a price increase (decrease) is 11 (15) percent. The aggregate hazard function of prices is decreasing with time. Besides heterogeneity across products and price setters, this is due to oversampling of products with a high frequency of price changes. Accounting for unobserved heterogeneity in estimating the probability of a price change with a fixed-effects logit model, we find a positive effect of the duration of a price spell. During the Euro cash changeover the probability of price changes was higher.
JEL Code
C41 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Duration Analysis, Optimal Timing Strategies
D21 : Microeconomics→Production and Organizations→Firm Behavior: Theory
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
Network
Eurosystem inflation persistence network
21 June 2005
WORKING PAPER SERIES - No. 496
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Abstract
This paper extends the existing literature on the open economy New Keynesian Phillips Curve by incorporating three different factors of production, domestic labor and imported as well as domestically produced intermediate goods, into a general model which nests existing closed economy and open economy models as special cases. The model is then estimated for 9 euro area countries and the euro area aggregate. We find that structural price rigidity is systematically lower in the open economy specification of the model than in the closed economy specification indicating that when firms face more variable input costs they tend to adjust their prices more frequently. However, when the model is estimated in its general specification including also domestic intermediate inputs, price rigidity increases again compared to the open economy specification without domestic intermediate inputs.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
E12 : Macroeconomics and Monetary Economics→General Aggregative Models→Keynes, Keynesian, Post-Keynesian
Network
Eurosystem inflation persistence network