Roberto Sabbatini

Price setting in the euro area : some stylised facts from individual producer price data

This paper documents producer price setting in 6 countries of the euro area: Germany, France, Italy, Spain, Belgium and Portugal. It collects evidence from available studies on each of those countries and also provides new evidence. These studies use monthly producer price data. The following five stylised facts emerge consistently across countries. First, producer prices change infrequently: each month around 21% of prices change. Second, there is substantial cross-sector heterogeneity in the frequency of price changes: prices change very often in the energy sector, less often in food and intermediate goods and least often in non-durable non- food and durable goods. Third, countries have a similar ranking of industries in terms of frequency of price changes. Fourth, there is no evidence of downward nominal rigidity: price changes are for about 45% decreases and 55% increases. Fifth, price changes are sizeable compared to the inflation rate. The paper also examines the factors driving producer price changes. It finds that costs structure, competition, seasonality, inflation and attractive pricing all play a role in driving producer price changes. In addition producer prices tend to be more flexible than consumer prices.

The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence

This study investigates the pricing behaviour of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks. Overall, more than 11,000 firms participated in the survey. The results are very robust across countries. Firms operate in monopolistically competitive markets, where prices are mostly set following mark-up rules and where price discrimination is a common practice. Our evidence suggests that both time- and state-dependent pricing strategies are applied by firms in the euro area: around one-third of the companies follow mainly time-dependent pricing rules while two-thirds use pricing rules with some element of statedependence. Although the majority of firms take into account a wide range of information, including past and expected economic developments, about one-third adopts a purely backward-looking behaviour. The pattern of results lends support to the recent wave of estimations of hybrid versions of the New Keynesian Phillips Curve. Price stickiness arises both at the stage when firms review their prices and again when they actually change prices. The most relevant factors underlying price rigidity are customer relationships – as expressed in the theories about explicit and implicit contracts – and thus, are mainly found at the price changing (second) stage of the price adjustment process. Finally, we provide evidence that firms adjust prices asymmetrically in response to shocks, depending on the direction of the adjustment and the source of the shock: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, reductions in demand are more likely to induce a price change than increases in demand.

What's Behind 'Inflation Perceptions'? A Survey-Based Analysis of Italian Consumers

This study investigates inflation perceptions, and their relationship with factors likely to affect them, through a survey of a representative sample of Italian consumers. The results show that reported inflation is, on average, much higher than measured by official statistics. Inflation perceptions are higher for women, the unemployed and less educated individuals, as well as for consumers with some forms of financial distress. A very low knowledge of the inflation concept and related statistics and an inaccurate memory of past prices turn out to play a significant role in explaining the highest class of perceptions. These results suggest that when consumers express their opinions on what they report as “inflation”, they are incorporating a complex combination of forces that go well beyond the phenomena measured by official inflation statistics.

How are Firms' Wages and Prices Linked: Survey Evidence in Europe

This paper presents new evidence on the patterns of price and wage adjustment in European firms and on the extent of nominal rigidities. It uses a unique dataset collected through a firm-level survey conducted in a broad range of countries and covering various sectors. Several conclusions are drawn from this evidence. Firms adjust wages less frequently than prices: the former tend to remain unchanged for about 15 months on average, the latter for around 10 months. The degree of price rigidity varies substantially across sectors and depends strongly on economic features, such as the intensity of competition, the exposure to foreign markets and the share of labour costs in total cost. Instead, country specificities, mostly related to the labour market institutional setting, are more relevant in characterising the pattern of wage adjustment. The latter exhibits also a substantial degree of time-dependence, as firms tend to concentrate wage changes in a specific month, mostly January in the majority of countries. Wage and price changes feed into each other at the micro level and there is a relationship between wage and price rigidity.

Perceived and Measured Inflation after the Launch of the Euro: Explaining the Gap in Italy

Following the euro cash changeover, residents in the area perceived a much sharper increase in prices than the moderate rise recorded in official statistics. The paper shows that in Italy this gap can be explained for the most part by the stronger influence that large, upward, and frequently observed price movements exert on consumers’ perceptions, combined with the actual behaviour of prices in the wake of the changeover, when many prices did in fact change, with larger increases for the more frequently purchased products and exceptional rises in certain items. The interplay between public perceptions and media coverage also had a significant role. Finally, the perceived loss of purchasing power, especially for the least-well-off households, can be traced to economic phenomena that do not bear directly on official inflation but which households find it hard to consider separately, such as increases in house prices and the evolution of income.

Wage adjustment by Italian firms: any difference during the crisis? A survey-based analysis

The study analyses wage adjustment by Italian firms on the basis of information collected through a coordinated survey carried out in 17 European countries in two waves (at the beginning of 2008 and in the summer of 2009). The pre-crisis evidence indicates that the degree of wage rigidity is relatively high in Italy: wages remain unchanged on average for about two years, against an average of just over one year in the other countries. Italian firms hardly cut nominal wages, reflecting not only institutional constraints, but also an attempt to avoid a negative impact on their productivity. During the economic recession the firms most severely affected by the fall in demand reduced their costs mainly by adjusting the input of labour (in terms of both employment and hours worked). A higher incidence of skilled and white-collar workers was accompanied by greater recourse to strategies aimed at containing non-labour costs, presumably in order to preserve the human capital accumulated.

Wages and Prices in Italy During the Crisis: The Firms’ Perspective

Following the two surveys carried out in 2007 and 2009 on firms’ price and wage setting practices, in June 2013 the ESCB’s Wage Dynamics Network (WDN) conducted a third survey aimed at assessing, through a harmonised questionnaire, the most important transformations under way in the national labour markets. This paper documents the results of the survey carried out in Italy. The sovereign debt crisis severely hit the Italian economy, causing a collapse in demand, increased uncertainty and difficulties in accessing external finance. Firms responded by decreasing labour input (adjusting both the intensive and the extensive margins) more often than wages. However, wage-setting practices were also affected by the new economic landscape: the percentage of workers employed in firms enacting wage freezes or cuts has steadily increased since 2010, reaching 17% of the total workforce in the sectors considered in 2013. Furthermore, a large share of companies have adapted their pricing strategy to the new economic environment; the frequency of price adjustments has increased, mainly as a reaction to stronger competition.

Impact of the cash changeover on prices and inflation perceptions in the euro area: a survey of the empirical evidence

This chapter reviews the studies for other euro-area countries on the issues treated in the preceding chapters for Italy. The discussion turns around two themes. The first, extensively discussed in section 7.2, concerns the wide post-changeover disparity between perceived and officially measured inflation and, more generally, the mechanisms underlying the formation of individual opinions on inflation. The contributions on this theme are differentiated and surveyed according to their method of inquiry.2 One approach hypothesizes that perceptions in the post-changeover period were influenced disproportionately by the price movements of specific subsets of goods and services included in the index, especially those that consumers purchase most frequently. A second approach posits that in concomitance with the changeover perceptions were affected by modifications in the distribution of prices and price changes, above all by the proportion of products whose price changed, the number and the size of the increases compared with the decreases, the exceptionally large increases for certain products and the number of different prices for the same type of product. A third approach relies on experimental psychology and probes more deeply into the mechanisms by which individuals’ price estimates are formed and on the role of memory. Finally, more recent contributions consider a combination of factors and assess their relative importance in a unified analytical framework, going beyond the specific case of the changeover; a few of them also refer to quantitative measures of inflation perceptions, as in chapter 6 for Italy.