Why is Services Inflation Higher than Goods Inflation in the Euro Area?

32 Pages Posted: 19 Jan 2009

Date Written: January 16, 2009

Abstract

The persistent divergence between services and goods inflation in the euro area points to a deficit in productivity growth in services activities. A relative worsening in services sector competition appeared to play a role from the early 1980s to the mid-1990s, with the sector having displayed relatively high mark-ups ever since. Other factors, such as the upward trend in services demand relative to goods, and open-economy considerations (including heightened foreign competition and a changing euro exchange rate) have not played a sustained role in driving inflation in services higher than in goods. Structural reforms aimed at raising productivity growth and enhancing competition in the services sector would contribute to make relative price adjustments smoother while also facilitating the achievement of price stability.

Keywords: Services inflation, Goods inflation, Euro area, Balassa-Samuelson effect

JEL Classification: E31, F40

Suggested Citation

Sanchez, Marcelo, Why is Services Inflation Higher than Goods Inflation in the Euro Area? (January 16, 2009). Available at SSRN: https://ssrn.com/abstract=1328827 or http://dx.doi.org/10.2139/ssrn.1328827

Marcelo Sanchez (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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