Administered Prices, Inflation and the Business Cycle – Selected Aspects

The public sector plays a central role in price-setting in some markets for goods and services. Consequently, Eurostat began to publish a new series of inflation indices referred to as the HIPC-AP in early 2010 that summarizes the development of publicly administered prices. This study presents a detailed account of the concept underlying the new series and provides a cross-country analysis for the euro area. Administered prices are a key component of the HICP basket, currently accounting for 11.0% of the HICP (euro area average). This share has declined in the past decade in line with the liberalization of goods and service markets. The inflation rates of administered prices and those of flexible prices (i.e. the HICP excluding administered prices) differ with respect to both their levels and their development over time. In many euro area countries, the average HICP-AP rate of inflation has surpassed the all-items HICP inflation rate over the past ten years. In Austria, as in other euro area countries, flexible prices are found to be a leading indicator for the HICP rather than vice-versa. As public sector pricing takes place within a macroeconomic context, this study also represents a first effort to shed light on the main economic determinants of the development of the HICP-AP. The key findings are that cost-push shocks exercise a significant influence on the inflation of flexible prices, whereas their influence on administered prices is smaller or statistically not significantly different from zero.