Rates of inflation tend to vary among sectors of the economy. In the United Kingdom, annual retail price inflation has, on average, been some two percentage points lower in the goods sector than in the services sector since the early I 980s. This gap, which largely reflects differing rates of productivity growth and the effects of overseas competition, has widened since 1990. This article analyses the UK data on retail price inflation in the goods and services sectors, and attempts to explain their behaviour. It also briefly outlines the experience in other EC countries.
The main points are:
- Since late 1990, the difference between goods and services sector inflation has increased, with goods price inflation slowing much more sharply than services price inflation.
- Much of the underlying divergence reflects continuing faster productivity gains in manufacturing.
- But unusually heavy price discounting in the 'sales' has been an important factor, together with overseas competition which has generated significant downward pressure on tradable prices, reflecting the strong exchange rate associated with ERM membership.
- Sectoral inflation rates have diverged in many other EC countries over the last decade, especially in Italy and Spain, but less so in Germany and France than in the United Kingdom.