While inflation has been in decline since mid-2023, notably due to the significant slowdown in food prices, the prices of services remain relatively dynamic. Thus, taking into account their weight in the household consumer basket (around 50%), services have been the main contributors to headline inflation since October 2023. As a result, changes in the prices of services, where the cost of labour plays a major role, can provide information on the risk of a runaway wage-price spiral.

The sharp increase in the consumer prices of energy products in 2021 and 2022 was followed first by strong inflation in food products (and to a lesser extent in manufactured products). The increase in the prices of services came later and was more contained. These differences can be explained by the nature of the price shock, which was essentially imported. Clearly, the shock spread to domestic prices, but the extent and timing of this spread depended mainly on the structure of the inputs of each sector (majority of commodities or majority of labour force), and on other factors (degree of competition, types of contract upstream and downstream of production, etc.).

This Focus models changes in the consumer prices of services. Although services represent almost 50% of the consumer price index basket, the scope chosen for this Focus is limited to a services sub-field which accounts for most of the variation in the prices of services; in particular, administered prices or prices that are too volatile have been removed. This sub-field therefore includes, on the one hand, accommodation-catering and on the other hand, a set of services called, for the purposes of this Focus, “miscellaneous services” (maintenance and repair services, IT, legal, cultural and recreational services, aesthetic services, etc.). The price of “miscellaneous services” increased by around 5% in 2023 compared to 2022 and by about 9.4% compared to 2021. According to the model used here, the cost of labour would appear to account for almost 65% of the increase in prices in “miscellaneous services” between 2021 and 2023. In accommodation-catering, agrifood products –whose prices were particularly dynamic across the time period– are important inputs, alongside labour force. Thus the cost of labour would appear to account for a little over 45% of the increase in accommodation and catering prices between 2021 and 2023 (which was around +10%), while the increase in agrifood products would appear to account for almost 25%. The model suggests that consumer prices of services probably evolve according to their “historical behaviour”, without the wage-price spiral spinning out of control.

The model selected here suggests two main reasons why the prices of services continue to rise (around +1% per quarter since the beginning of 2023) and why this rise is delayed. First, the predominant weight of the labour factor in the function of production: the dynamism of the price of services occurs later as wages lag behind in adjusting to inflation. In addition, delays in passing on the price of services are structurally lengthy: the earlier increase in the cost of labour does not yet seem to have been entirely passed on to prices. This would justify forecasting an increase in prices of “miscellaneous services” and accommodation-catering of around +1% per quarter, but without them picking up further in 2024...