Prices of Belgian consumer goods change on average every five months
By drawing on a database made available by Statbel containing as many as 9 million price quotes covering the period 2007-2015, we answer the following questions: how often do prices change in Belgium? How big are these adjustments? When are they made? Do the findings differ from one product category to another?
We use microdata underlying the Belgian consumer price index. The products concerned cover almost half of the basket for the official index; all of the food products but only a part of manufactured goods and services. Monthly price quotes are obtained at the most detailed level possible: product, brand, packaging, precise sales point. Starting from this granular level, we calculate the frequency of price changes and, conversely, the duration of a price.
As the sample does not cover the summer and winter sales, if temporary promotions are excluded, our findings show that, on average, each month, 17 % of all prices change. In other words, they have an average duration of 5 months. Increases are certainly more common than decreases (two-thirds of all changes), but price reductions are not rare. If temporary promotions are included, this ratio of price changes is scarcely any higher, at 18 %, and price reductions are logically more frequent (four in every ten cases). Our findings fall within the range of results that emerge from the literature on this subject.
Considerable heterogeneity from one product category to another is also observed. Prices of food products (unprocessed and processed) change more often than those for non-energy industrial goods and services: their average duration ranges from three months for fresh produce (2 months more for processed food products) to 27 months for services. Non-energy industrial goods covering mainly clothing and motor vehicles have an average duration of 13 months. The long duration of prices for services is partly due to the items covered in our sample; we notably include all the price data collected from restaurants and cafés – where price changes are subject to so-called menu costs –, hairdressers and housing-related services (electricity work, plumbing, etc.) where prices rarely change. Services prices that are likely to change more often, as for instance telecommunications or travel, are not included in the dataset. Besides composition effects, other factors may explain the relative price rigidity: explicit and implicit contracts with customers, fear of losing market share in the event of uncoordinated price changes and the slow and only partial feed-through to prices of certain inputs such as wages.
Price reductions are clearly more common in the case of fresh produce, with a fraction of 40 % of all adjustments than, at the other end of the scale, in services (fraction of 12 %).
Over the whole sample and observation period, the absolute average size of a price change is 12 % and few differences are noted between the average size of price increases and decreases. The fraction of small price changes is 7 % for the whole sample if the threshold is set at 1 % and 15 % if the threshold is set at 2 %. As expected, price changes are bigger for fresh produce (18 %, for price increases and decreases). This reflects their greater volatility, being sensitive to weather conditions and having an inelastic supply in the short term. By contrast, the size of price changes for processed food products, non-energy industrial goods and services is smaller, at respectively, 7, 10 and 7 %.
Price rises occur more often in January, February, April and October, while price cuts occur more often in April, July and October. The sample average masks the particular characteristics of certain products and services, so there are distinct seasonality trends from one category to another.
While price changes for unprocessed food products do not seem to be time-specific, it is in the first few months of the year that firms tend to adjust processed food product prices upwards. Non-energy industrial goods have a particularly seasonal nature with price changes concentrated in April and October. This reflects the effect of new winter and summer clothing collections being introduced: new characteristics can explain both upward and downward price adjustments. The seasonal trends observed in prices for services can be explained by the weight of restaurants and cafés where menu prices tend to be adjusted (generally upwards) at the beginning of the year or after the summer holidays.
The rhythm of monthly price adjustments has changed over the years. During the great recession (2008-2009), the frequency of price rises tended to drop, while the frequency of price cuts tended to increase. The same trends were observed at the beginning of the low inflation period in the euro area (2013-2014). Between the two periods, there was a movement in the opposite direction. These preliminary findings – which need to be extended and need to be researched in more depth – suggest that price-setting behaviour is not only time-dependent (adjustments at fixed moments in time) but also depends on the economic situation.