Consumer price rigidity in the Baltic states during periods of low and high inflation

Ludmila Fadejeva (), Valentin Jouvanceau () and Alari Paulus ()
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Ludmila Fadejeva: Latvijas Banka
Valentin Jouvanceau: Lietuvos Bankas
Alari Paulus: Eesti Pank

No 125, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: The Baltic states experienced the most substantial consumer price inflation of any of the EU countries shortly after the COVID-19 pandemic. The year-on-year all-items inflation rate averaged 11% from January 2021 to September 2023, peaking at around 22% in late 2022. This study examines how consumer price rigidity in the region during this period of high inflation differed from the preceding period of low inflation in 2019-2020. We use the detailed price records that underlie the official consumer price indexes to assess the frequency and the size margins of price changes. The average frequency of price changes increased by about four percentage points when inflation was high, as an increase of five percentage points in the frequency of price increases combined with a fall of one percentage point in the frequency of price cuts. The average size of price changes increased by 2.8 percentage points, mainly because the share of price increases changed. We further show that structural shocks in energy prices and aggregate demand contributed significantly to fluctuations in the inflation rate through the frequency of price changes during the period of high inflation. All this points to pricing being state-dependent in the Baltic states.

Keywords: consumer price rigidity; price-setting; high inflation; frequency of price changes. (search for similar items in EconPapers)
JEL-codes: D40 E31 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2024-09-23
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