Disinflation Dilemma: Sticky Services Prices, Driven by Wages and Expectations, Hinder ECB Target
SDG 8: Decent Work and Economic Growth | SDG 9: Industry, Innovation and Infrastructure
Institutions: Reserve Bank of India (RBI) | Ministry of Finance
The European Central Bank (ECB) Economic Bulletin article, “Not all prices disinflate alike: disentangling the dynamics of sticky and flexible-price items,” analyzes the persistence of inflation by dividing the Harmonised Index of Consumer Prices (HICP) core basket into two components based on the frequency of their price changes (HICP is the main measure of price inflation used by the European Central Bank (ECB) to assess price stability in the euro area). Items with a price change frequency at or below the median (7.3% monthly change) are classified as sticky.
The analysis reveals that sticky core inflation—which is primarily driven by services (31 out of 39 sticky core items)—has eased only gradually in recent months, hovering around 3.6%. This persistence is closely linked to past cost shocks and elevated wage pressures, suggesting firms with infrequent price changes place greater weight on longer-term inflation expectations. Conversely, flexible core inflation (dominated by Non-Energy Industrial Goods, or NEIG) is more volatile and has returned closer to its pre-pandemic average. This sustained stickiness in the services sector poses a significant challenge to achieving the central bank’s inflation targets.
The findings underscore the critical role of the labor market in the final stage of the disinflation process. Given that sticky services are highly labor-intensive, the persistence of inflation is structurally tied to wage dynamics and inflation expectations. For the RBI, this means that achieving the final policy target will depend less on global commodity shocks and more on anchoring medium-to-long-term inflation expectations among firms and workers.
What is the core difference between “sticky” and “flexible” prices for central bank policy? → Sticky prices, such as those for restaurants, maintenance, and social protection services, change price infrequently (less than 7.3% of the time in a typical month) and therefore place a higher weight on expected future inflation and persistent wage/cost shocks. Flexible prices (like garments or motor cars) change often and are highly volatile. For policy, persistent sticky inflation is a greater concern because it signals that longer-term inflation expectations may be becoming entrenched, making disinflation more difficult and reliant on slowing wage growth.
Relevant question for policy stakeholders: What specific macroprudential measures should the RBI monitor to assess whether elevated wage growth in India is becoming structurally embedded in services prices?
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