What Is Sticky Inflation and What Causes It?

Inflation refers to the general increase in prices for goods and services, leading to a decrease in purchasing power. While some price changes are temporary, “sticky inflation” describes a more persistent form of price increases. This article explores sticky inflation, its contributing factors, and how economic bodies track its progression.

Characteristics of Sticky Inflation

Sticky inflation resists downward movement; once prices rise, they tend to stay elevated or increase at a slower but consistent pace. Unlike volatile prices that fluctuate frequently, sticky prices adjust slowly and are less responsive to immediate economic conditions or monetary policy. This persistence means elevated price levels become embedded in the economy, making them difficult to dislodge. Prices often delay adjustment, even when initial demand or supply pressures subside.

This type of inflation contrasts sharply with “flexible” or “transitory” inflation, where prices respond quickly to market forces and can decline easily. For instance, gasoline prices are flexible, changing daily based on global oil supply and demand. Sticky prices, conversely, involve costs influenced by long-term contracts, consumer expectations, or regulatory frameworks, which slow price adjustments. They tend to maintain higher levels for extended periods, impacting household budgets and business planning.

Key Contributing Factors

Several primary elements contribute to sticky inflation, largely from economic components where prices do not adjust quickly. Wages are a significant factor, often determined by long-term contracts or collective bargaining agreements that lock in increases over multiple years. These predetermined wage increases then feed into the cost of goods and services, contributing to sustained price levels.

Housing costs also play a substantial role due to their long-term nature. Rental agreements typically span 12 months or more, meaning rent prices adjust only periodically. Property taxes and insurance premiums, adjusted annually or biannually, contribute to the slow-moving nature of housing expenses. These components form a large part of household budgets and business operating costs, making their slow adjustment a major driver of overall price stickiness.

Furthermore, prices for certain services often exhibit stickiness because they involve long-term planning, fixed costs, or professional fees not subject to rapid market fluctuations. Healthcare services, educational tuition, and legal fees are examples where price adjustments occur less frequently and tend to be gradual. These service sectors often have high barriers to entry, specialized labor, and regulatory oversight, which collectively reduce price competition and contribute to slower price movements.

How Sticky Inflation is Monitored

Economists and financial institutions monitor sticky inflation by analyzing specific economic indicators that filter out volatile price movements. One common approach involves tracking core inflation measures, which exclude fluctuating food and energy prices. Food and energy prices are highly susceptible to immediate supply shocks, making them less indicative of underlying inflationary trends. Removing these volatile components provides a clearer picture of persistent price changes.

Another method involves examining specific “sticky price” components within consumer price indices, such as the Consumer Price Index (CPI). Researchers categorize CPI components into those that change frequently and those that change infrequently, with the latter representing sticky prices. For instance, the Federal Reserve Bank of Atlanta maintains a “Sticky Price CPI” which tracks a subset of goods and services whose prices change relatively infrequently. This index helps identify ingrained inflationary pressures by focusing on items like housing, medical care services, and specific regulated utilities.