A question that has received much less attention in central banking circles, however, is whether and how the rise of the services sector has affected the transmission of monetary policy, and whether it has contributed to the stubbornly weak inflationary pressures that we are observing today.There are at least two broad and complementary channels through which this may happen.
If prices in the services sector differ in terms of level, volatility and persistence compared with other sectors, this can be expected to affect aggregate inflation dynamics.
The first channel relates to a – that is, to the changing weight of services in the consumption basket.
As final consumption expenditures shift, so do the weights used to calculate inflation. The weight of services in euro area core inflation has increased by around 10 percentage points since the launch of the single currency in 1999.
Idiosyncratic shocks in the services sector account for a larger share of aggregate fluctuations today than they did in the past.
Today, an arbitrary increase in service price inflation raises euro area core inflation by nearly 25% more than it did in the mid-1990s.