BOE paper reveals firms' state-dependent pricing impacts inflation
A new Bank of England working paper presents evidence on how UK firms set prices, revealing that state-dependent pricing has become more prevalent and significantly impacts inflation dynamics.
Shifting pricing strategies
New evidence from a UK survey shows 54 percent of firms used state-dependent pricing in 2023, up from 44 percent in 2019.
This flexible approach, where prices change based on market conditions, is more common among smaller firms and those with higher non-labour costs.
Inflation's flexible response
State-dependent firms experienced a sharper increase in price growth over 2022–23, then a faster decline.
Their prices respond more strongly to cost shocks, especially for larger shocks.
This has significant implications for inflation dynamics.
Source: State- and time-dependent pricing
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