Where do we stand with inflationary pressures arising from price resetting?

Prepared by Katalin Bodnár, Andrea Fabbri, Ieva Rubene and Zivile Zekaite

Published as part of the ECB Economic Bulletin, Issue 4/2025.

The disinflation in euro area services has been slower than that of the overall headline Harmonised Index of Consumer Prices (HICP) (Chart A). This is can be attributed to a combination of factors: a delayed response to the general inflation surge by some services prices, elevated wage pressures and strong demand for services (especially recreation services).^[1] This box focuses on the first factor and examines the role of the services items in the HICP basket that tend to be repriced less frequently and thus may still push up price pressures while other items are already experiencing disinflation.

The HICP services consumption basket comprises price indices with very different annual inflation rates. On the one hand, services include items related to travel, where prices tend to adjust to economic conditions and shocks very quickly. For example, the annual increase in prices for passenger transport by air shot up to 40% in mid-2022, ahead of the peak in total services in July 2023. Since mid-2023 it has occasionally recorded negative rates. On the other hand, prices of other components have shown stable annual increases, with very low volatility; for example, sewerage collection, where prices have risen very gradually, lagging the total services prices (Chart A).

Chart A

Euro area headline HICP, services and selected services components

(annual percentage changes)

The differences in annual inflation rates across components of services inflation are partly the result of a different frequency of price changes within the year. For instance, prices for passenger transport by air are highly volatile and the price index can rise or fall by more than 10% every month, depending on demand linked to the holiday seasons (Chart B, panel a). By contrast, price changes in other items, such as sewerage collection, are concentrated at certain points in the year (Chart B, panel b). Prices for services with less frequent price changes can be expected to react to general price and cost shocks with some lag. For both these categories, and also more generally, price changes have increased in the last few years but these continue to be aligned with pre-pandemic patterns in terms of their timing within the year (i.e. occurring in the same months, with seasonal swings for passenger transport by air and the largest change taking place in January for sewerage collection).

Chart B

Month-on-month price changes for selected HICP services items

a) Passenger transport by air	b) Sewerage collection
(percentages)	(percentages)

Infrequent price adjustments may be the consequence of longer-term relations between sellers and buyers, or of prices being directly set or heavily influenced by governments. Changing prices can be costly, leading to infrequent price adjustments, with the contractual relationship between the service provider and the customer fixed or prolonged for a specific time period. For example, housing rents or health insurance contracts tend to be renewed or repriced annually. Prices of non-contractual services may also be changed infrequently to preserve long-term relations between sellers and buyers, e.g. repairs of household appliances, such as sports or gardening equipment, haircuts, etc. Furthermore, the prices of some services items are set or significantly influenced by the government, i.e. for “administered” services. Prices for administered services are generally adjusted less frequently than prices for non-administered services.^[2] Typical examples of such services are utilities (refuse and sewerage collection), tertiary education and social protection services (e.g. childcare). As administered prices are classified at the national level, there are many services items for which prices are administered in some countries but not in others – and this may blur the euro area pattern somewhat.

The price changes in around a quarter of all services items are concentrated in one or two months of the year. Repricing can happen at different times in different countries, which means that finding a clear repricing pattern for the euro area aggregate is not a straightforward process. Our approach is based on the 39 euro area services items in the 4-digit Classification of Individual Consumption by Purpose (COICOP-4) over the period from 2016 to 2024. For each item, the following selection approach is applied. First, we calculate the month-on-month percentage price change for each calendar month, using non-seasonally adjusted price indices. Second, we calculate the average change for each calendar month over all the years in the period. Third, we calculate the relative importance, as a percentage share, of each month with respect to the total price change for the whole year. For the second and third steps, we use absolute values because these allow us to assess the relative magnitude of all price changes, independently of the direction of the change. For example, the share for January is the average of the monthly absolute price changes in the month of January for all years between 2016 and 2024 divided by the sum of the averages of all monthly absolute price changes over the same period. Fourth, we identify the calendar months where either (i) the percentage share of a price change in any single month is above 25%, or (ii) the combined share of any two months with the highest shares is above 35% of the total change over the sample period. Finally, a services item is assigned to the “annual repricing” category if it fulfils these criteria and the month-on-month price change for the identified calendar months is positive on average between 2016 and 2024.^[3] The thresholds are based on judgement but are relatively high in assuming that, at a minimum, between one-quarter and one-third of the change in a price index takes place in only one or two months of a year. For example, the results show that 48% of the total absolute price change for hospital services over the period occurred in the month of January in each year (Chart C).^[4] The approach identifies 16 services items – around 25% of total services (based on 2025 weights) – as having an annual repricing pattern. Around one-half of the items that are repriced annually fall into the administered prices category.

Chart C

An example of annual repricing: hospital services

Distribution of price index changes within a year

(percentages of the price change in each month relative to the change over the whole year, on average over the 2016-24 sample period)

For most items with an annual repricing pattern, the change in the price index mainly occurs early in the year. For most of the 16 items in the annual repricing category, January is the month, or one of the two months, showing the largest proportion of the price change in one year. There are a few exceptions – for example, education and canteens, where price changes mainly occur close to the start of the school year. The pattern for combined passenger transport is blurred by the impact of the introduction of the German public transport ticket and the subsequent price changes applied to it. Given the sheer size of this effect, it is helpful to exclude the impact of this item to gain a better understanding of the underlying services price dynamics.^[5]

Items that show an annual repricing pattern have played an increasing role in keeping services inflation elevated. During the latest inflation surge, the inflation rates of items without an annual repricing pattern rose earlier and more sharply than those of items with an annual repricing pattern, especially for administered items (Chart D). As the upward cost shocks started to unwind, inflation for items with non-annual repricing declined more noticeably, while the inflation rate of services items with annual repricing (excluding combined passenger transport) hovered at slightly above 4.0% in the second half of 2023 and in 2024. The inflation rate of items with a repricing pattern has been slightly above the rate of services without annual repricing since the end of 2023. This is mainly a result of the particularly high inflation rate of administered items within the annual repricing group.

Chart D

HICP services items with an annual repricing pattern

(annual percentage changes)

At the beginning of 2025, items that are repriced annually remained an important factor behind the persistence of services inflation. As price changes for items with annual repricing occur predominantly in January, their month-on-month changes in January offer useful insights into annual inflation developments. In January 2025 annually repriced items with administered prices showed the strongest month-on-month increase, which even surpassed the rise seen a year ago. By contrast, price changes in non-administered annually repriced items eased compared with the previous year (Chart E). The inflation rate of services items without a repricing pattern has also declined visibly as of January 2025. However, part of the drop in March and the rebound in April reflects the different Easter dates in 2024 and 2025. The decoupling of administered price inflation from broader services inflation should be closely monitored, as forecasting models are not able to appropriately capture the drivers of price dynamics for these services, which are often strongly linked to fiscal considerations.

Chart E

Month-on-month price changes for items with an annual repricing pattern

a) Administered prices with annual repricing	b) Other items with annual repricing
(percentage changes of non-seasonally adjusted index)	(percentage changes of non-seasonally adjusted index)

To conclude, the disinflation in services is expected to be supported by a normalisation of annual repricing patterns. While inflation for items with a repricing pattern, especially those with administered prices, remains persistent, most of the delayed adjustment to past shocks should now be largely completed. Hence, future repricing steps should become smaller and more in line with general inflation trends.