How Europe’s Inflation Surge Changed the Way Firms Set Consumer Prices

A new Eurosystem study finds that during the 2021 to 2024 inflation surge, euro area firms raised prices more often rather than by much larger amounts, making inflation spread faster across the economy. As inflation eased, price-setting behaviour largely returned to normal, showing that the spike in price flexibility was temporary rather than permanent.

When inflation swept across the euro area between 2021 and 2024, households saw prices jump almost everywhere, from groceries to services. But what was happening behind the scenes? A new study by economists from the European Central Bank and national central banks, including Banco de Portugal, Banca d’Italia, the National Bank of Belgium, and the Oesterreichische Nationalbank, offers a detailed answer.

Using more than 190 million individual price quotes from nine euro area countries, the researchers examined how often firms changed prices and by how much. The data provide one of the clearest pictures yet of how businesses reacted during the sharpest inflation surge in decades.

Prices Changed More Often

During the decade before the pandemic, inflation in the euro area was low and stable. Prices were “sticky”, meaning they did not change frequently. On average, fewer than 9 percent of prices changed in a given month between 2010 and 2019.

That pattern shifted dramatically in 2022. As energy and input costs soared, firms began adjusting prices much more often. The share of prices changing each month rose from about 8 percent before the pandemic to around 12 percent in 2022, peaking at nearly 16 percent in early 2023. At the height of the surge, roughly one in six prices was being revised every month.

The increase was widespread. More than two-thirds of product categories saw more frequent price changes. Food prices reacted the fastest, which is not surprising given their exposure to energy and commodity costs. Non-energy industrial goods and services also showed stronger price activity, although services adjusted more slowly and remained somewhat elevated even after inflation began to ease.

It Was About Frequency, Not Bigger Jumps

One might assume that inflation rose because firms were imposing much larger price hikes. The study tells a different story.

The main driver of inflation was that more firms were raising prices, not that each price increase was dramatically larger. Before 2020, about two-thirds of all price changes were increases. In 2022, that share climbed to more than 80 percent.

The average size of price changes did rise during the surge, but mostly because price increases became more common than price cuts. When looking separately at the size of increases and decreases, the changes were relatively modest.

In simple terms, inflation accelerated because more companies adjusted prices upward, and they did so more often.

Energy Costs Played a Key Role

The study also explored why firms reacted more quickly. The evidence supports what economists call “state-dependent pricing.” This means businesses are more likely to adjust prices when their current price is far from what they consider optimal.

Products that rely heavily on imported energy inputs showed a stronger increase in the frequency of price changes. When energy prices surged, firms facing higher costs had stronger incentives to update prices quickly.

The researchers found that the probability of a price change increases the further a price moves away from its estimated ideal level. In other words, the bigger the cost pressure, the faster firms respond.

A Temporary Shift with Big Policy Lessons

To understand the broader impact, the researchers used a macroeconomic model that allows the frequency of price changes to rise when inflation is high. Their simulations suggest that inflation would have peaked almost one percentage point lower if firms had not increased how often they changed prices.

This means the temporary rise in price flexibility amplified the inflation spike. When prices adjust more frequently, shocks move through the economy faster.

However, the shift appears to have been temporary. As inflation eased in 2023 and 2024, the frequency of price changes gradually returned close to pre-pandemic levels, especially for food and industrial goods. Service prices remained somewhat more flexible, but overall, price-setting behaviour largely normalised.

For policymakers, the findings are important. They show that inflation dynamics can change when the economy is under stress. When inflation is low, prices tend to be sticky. When inflation rises sharply, firms respond more quickly and more broadly. But once the shock fades, the economy can return to its earlier pattern.

The study offers a clear message: during the recent surge, Europe did not just experience higher prices. It experienced a temporary shift in how prices are set.