- In the long run, most sectors have (some) pricing power. By comparing the evolution of retail prices with changes in producer prices, we find that only five out of 19 sectors (textiles, household appliances, cleaning products, telephone services and restaurants) lack long-term pricing power. We also find that consumer electronics, pharmaceuticals and airlines have the most pricing power among our sample.
- However, the lack of short-term pricing power for many sectors means low inflation risk in the Eurozone. In a context of rising input prices, the potential short-term pricing power of firms is key for reflating the economy. Nevertheless, through our causality analysis, we find that only sectors accounting for a third of the Harmonised Index of Consumer Prices (HICP) have the ability to increase retail prices. Consequently, we see no evidence pointing toward a sustained pick-up in inflation in the Eurozone.
- From a sector risk perspective, only pharmaceuticals, computers and consumer electronics are immune to rising input prices. Through our risk score based on 1) short-term pricing power, 2) demand elasticity, 3) the trend in profitability, 4) recent changes in input prices and 5) the ability to offset rising input prices through exports, we find that only firms in these three sectors will not be under financial pressure from rising input prices. Other sectors might experience pressure on their margins over the next few months as we expect input prices to ease only in Q3 2021.