Why is Services Inflation Higher than Goods Inflation in the Euro Area?
32 Pages Posted: 19 Jan 2009
Date Written: January 16, 2009
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: Suggested Citation