Over recent years, European households have become increasingly aware that while inflation may moderate, the prices they pay for everyday goods and services often remain higher for longer. In the European Central Bank (ECB)’s inflation data, the harmonised index of consumer prices (HICP) for the euro-area registered around 2.0 % in August 2025. While this level is near the ECB target of “below but close to 2 %” over the medium term, many consumers do not feel a return to “normal” pricing. This apparent disconnect arises because of two interacting forces: sticky prices on the retail side and consumer perception that adjusts slowly.
Understanding Price Stickiness in Europe
Empirical research on price-setting in the euro-area highlights that consumer prices tend to change infrequently. A working paper by the ECB indicates that, in low inflation environments, consumer prices are adjusted on average approximately once per year. Sectoral variation is important. For example, prices in the services sector adjust less often than those for energy or unprocessed food. Firms tend to adjust upward more readily than downward in response to cost pressures and are slower to reverse when those pressures ease. The consequence is that when inflation slows or even negative shocks hit, many prices remain at elevated levels, creating a sense among consumers that “prices never come down”.
What This Means for Consumers
From the consumer’s vantage point, the combination of headline inflation moderation and relative price-persistence generates frustration. Even though inflation in the euro-area dropped to 1.9 % in May 2025 from 2.2 % in April, as the flash estimate shows, households did not observe widespread price reductions. Because the base level of many prices has been reset upward (for example during the surge in inflation during 2021-22), the new “higher normal” becomes the reference point. The public often overlooks how much prices rose during the peak inflation period and thus underestimates the elevated baseline.
Moreover, consumer behaviour anchors around relative comparisons: if prices rise for frequently-purchased items (groceries, utilities) but seldom fall, then discretionary spending becomes constrained. In many European countries, visible costs such as housing, services, and energy remain elevated even if headline inflation slows. For example, a profile analysis of price adjustment finds that large price changes (on the order of 5-10 %) occur when they do, but the waiting time adds to the perceived burden.
Structural Drivers of the “Illusion”
Several structural features underpin the inflation illusion in Europe:
- Cost-pass-through and upward bias: Firms facing rising input costs (energy, commodity, labour) tend to raise prices rapidly but defer reductions when input costs fall. The ECB’s micro-evidence confirms this asymmetry.
- Contracts and menu-cost effects: While classic menu-cost models emphasise the expense of changing price lists, the empirical literature suggests that implicit contracts and strategic inertia matter more in Europe.
- Sectoral heterogeneity: Services in particular adjust less often than goods. Because services form a large and growing share of consumption in many European economies, this inertia becomes visible in household budgets.
- High past inflation baseline: The inflation surge in the euro-area during 2021-22—at times reaching double-digit rates in some countries—reset many nominal price levels upward. For households, the baseline shifted, which means that even returning to 2 % inflation still reflects a substantially higher cost-of-living than pre-surge.
Why the Illusion Matters
For European consumers, the inflation illusion has consequences. It undermines confidence in purchasing power improvement even as monetary policy appears to succeed. It also shapes expectations: if consumers believe prices will not come down, they may reduce non-essential spending, dampening demand and complicating recovery efforts. In many markets, this expectation about pricing behaviour influences how people respond to “sales” or “discounts”—they may view them as temporary or strategic rather than genuine reversals of price increases.
Summary
In sum, the inflation illusion in Europe arises because prices tend to adjust infrequently and asymmetrically, and because recent inflation surges have elevated the baseline many consumers reference. Even when headline inflation moves toward target levels, the lived experience on household budgets may feel persistently challenging. As a result, understanding consumer sentiment and paid-price dynamics becomes essential—not only macro aggregates. This sets the stage for firms and policymakers to recognise that the end of high inflation does not automatically translate into broadly falling prices or improved consumer perceptions.