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One of the most striking trends in advanced economies over the past few decades has been the growing importance of the services sector in aggregate economic activity. First, from 1970 to 2010, the share of services in total gross value added increased by more than 20 percentage points in the euro area and by about 14 and 16 percentage points in the United States and Japan respectively. Second, and unsurprisingly given that many services are labour intensive, there has been an even greater increase in the percentage of the workforce employed in the services sector. In 2010, the services sector accounted for three-quarters of the jobs in the euro area, while in 1970 this figure was about 45%.The situation in the United States is even more stark.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.In the United States, households today spend nearly 70% of their consumption expenditure on services, and in Japan, this figure is 60%.These developments have been studied widely in the literature.In the United States, services today account for three-quarters of the core CPI basket.
Finally, I will argue that policies that can help raise productivity and competition in the services sector may contribute to reduce the lags with which monetary policy is transmitted to consumer prices.This means that it takes longer for inflation to respond to changes in monetary policy and economic activity than it did a few decades ago.I will also suggest that the rise of the services sector in our economies has only affected the pace of the response of inflation to shocks, but not the overall effectiveness of monetary policy.One aspect that has received much less attention in the public discussion, however, relates to the impact of the structural transformation of our economies on inflation dynamics and monetary policy transmission.There are many dimensions to this transformation to which central banks should remain alert, including the impact of ageing and, looking forward, climate change.