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patterns in UK worth information on the micro stage – Financial institution Underground

Lennart Brandt, Natalie Burr and Krisztian Gado

The Financial institution of England has a 2% annual inflation price goal within the ONS’ client costs index. However its 700 merchandise classes, we discover that only a few costs ever change by 2%. Actually, on a month-on-month foundation, solely about one fifth of costs change in any respect. As a substitute, we observe what economists name ‘sticky costs’: the worth of an merchandise will stay fastened for an prolonged period of time after which modify in a single giant step. We doc the time-varying nature of stickiness by trying on the share of worth modifications and their distribution within the UK microdata. We discover a seen discontinuity in price-setting within the first quarter of 2022, which has solely partially unwound.

Concept of sticky costs and associated literature

Understanding price-setting dynamics is important for central banks. Most structural fashions within the literature use a type of time-dependent pricing, beneath which corporations hold costs the identical for fastened quantities of time (Taylor (1980)), or for random quantities of time such that there’s uncertainty in regards to the exact size of the worth spell (Calvo (1983)). One other method of modelling sticky costs emphasises that corporations is not going to simply have a look at the time that has handed since they final adjusted its worth, but additionally at how far their worth is from some desired worth stage. That is known as state-dependent pricing. Macroeconomic fashions don’t usually enable for time-variation within the diploma of stickiness or switching between pricing methods. Not too long ago, nevertheless, corporations within the Resolution Maker Panel inform us that they’ve moved more and more away from time-dependent in direction of state-dependent pricing. On this case, when there’s a giant shock affecting many corporations, the shock results in an elevated frequency of worth modifications and so extra rapid pass-through to general inflation.

To be able to higher perceive the pricing behaviour of corporations in occasions of huge inflationary shocks, we discover the pricing dynamics on the micro stage utilizing CPI microdata revealed by the ONS. We’re in fact not the one ones who’ve been fascinated with one of these information. Financial institution authors have been utilizing this information set for a lot of years. For instance, Bunn and Ellis (2011) doc stylised info about pricing behaviour from the UK microdata and the August 2020 Financial Coverage Report used CPI microdata to tell coverage. Elsewhere, Karadi et al (2020) use US microdata to analyse corporations’ price-setting in response to modifications in credit score situations and financial coverage. Nakamura et al (2018) analyse the societal price of excessive inflation utilizing microdata from the Seventies and Nineteen Eighties, and Montag and Villar (2023) analyse the impact of extra frequent price-changes on combination inflation throughout Covid. Relatedly, Davies (2021) finds that the distinction between the share of worth rises and worth cuts within the UK microdata is said to combination inflation, specializing in price-setting in the course of the pandemic. And at last, authors of the FT’s Alphaville weblog have additionally been trying into these information (see right here and right here).

The info

The microdata spanning from 1996 till September 2023 is publicly out there and up to date month-to-month after every CPI launch. It accommodates the month-to-month worth quote information underpinning the ONS’ CPI sequence for over 700 gadgets with identifiers on the store, store kind, and area ranges. We clear the info which works out to about 30 million observations. When figuring out a worth change within the information, which is finally what issues for inflation, we attempt to be as exact as attainable almost about the product and the timing of the change. To that finish we solely depend the change if we discover the identical merchandise, in the identical area, in the identical store, in two precisely neighbouring months. For instance, if a bag of potatoes price £2 in January and £3 in March however was not recorded in February, somewhat than imputing a worth we discard the statement since we can’t be certain during which month the change really occurred.

Stylised info from the microdata

A short have a look at the info lets us set up some stylised info. Chart 1 exhibits a decomposition of those month-on-month worth actions over all gadgets within the information set. 4 key observations stand out:

  1. Costs rise and fall on a regular basis, however the overwhelming majority of costs don’t change between months. In any given month, on common since 1996, round 80% of costs stay unchanged relative to the earlier month (blue line).
  2. The share of costs rising (in inexperienced) has elevated notably since 2021 to an extent that has not occurred in earlier inflationary episodes within the pattern (excluding VAT modifications).
  3. The share of costs falling (in purple) has fallen considerably however stays secure since 2021, relative to historic common. The principle margin of adjustment has been within the share of worth will increase.
  4. However, in latest months, whereas the share of costs rising has tapered off, it stays elevated relative to its historic common. 

Chart 1: Decomposition of worth actions month-on-month

Notes: The share of costs rising and falling mirror month-on-month modifications. Shares are seasonally adjusted utilizing the R bundle seasonal. Spikes in 2008, 2010 and 2011 are a consequence of UK VAT modifications (17.5% to fifteen% in 2008, improve to 17.5% in 2010 and improve to twenty% in 2011). The gray shaded space covers the time between March 2020 and July 2021 when the economic system (and information assortment) was most affected by the Covid pandemic. Dashed strains present the 2011–19 averages. Newest statement: September 2023.

Sources: ONS and authors’ calculations.

To be clear, this chart isn’t saying that 80% of merchandise by no means change costs. If the worth of an merchandise remained fixed between December and January, and rose between January and February, it could transfer from the blue into the inexperienced class throughout this era. Equally, it could fall out of the inexperienced, into the blue or purple, if from February to March the worth once more remained fixed, or fell, respectively.

So, maybe surprisingly, this chart exhibits that month-to-month worth dynamics within the economic system are pushed by solely a comparatively small fraction of roughly 20% of all items and providers within the consumption basket. Additionally, we see that in the newest episode, the shift into rising costs has been largely out of the ‘no change’ class. Therefore, fewer costs are staying fastened, and extra are rising. It’s value noting that the latest up-tick within the shares of costs rising is barely matched traditionally by these brought on by VAT modifications in 2008, 2010 and 2011, which nevertheless seem as one-off worth spikes somewhat than a persistently greater share of worth rises, as in 2022.

If it’s a minority of complete merchandise whose worth modifications, you will need to take a better look. Chart 2 exhibits the distribution of costs modifications from 2019 by quarter (truncated at zero to exclude no-change observations). In step with the rise within the inexperienced line in Chart 1, we observe that over 2021 and 2022 lots of mass moved into the suitable aspect of the distribution, that’s the share of worth will increase, with the share of worth decreases being comparatively secure.

Chart 2: Evolution of the distribution of worth modifications by quarter 2019–23

Notes: The share of costs that didn’t change is excluded from these densities. The truncated densities are estimated in R through the Bounded Density Estimation bundle utilizing the boundary kernel estimator. Darker colors correspond to quarters during which year-on-year CPI inflation was comparatively excessive, lighter colors to quarters during which it was low. Every distribution represents month-on-month modifications throughout the identical quarter. Newest statement: 2023 Q3.

Sources: ONS and authors’ calculations.

A observe on the chart: the distribution of worth modifications, when combination inflation is at or shut to focus on, is roughly symmetric in logarithms. On this scale, a doubling (+100%) is equally far-off from zero as a halving of the worth (-50%). As a consequence of gross sales, the doubling and halving of costs really occurs repeatedly within the information, which explains the bunching round these factors. Whereas these could also be a supply of seasonality within the information, which can obscure the underlying dynamics, we don’t imagine they’re vital for the general form of the distribution which we present right here.

In Chart 3, we zoom in on a few these densities to higher see variations of their form. They’re the densities corresponding to cost modifications within the third quarter of 2022 and 2023 alongside a median density over the pre-Covid interval.

Chart 3: Comparability of densities from 2022 and 2023 towards a pre-Covid common

Notes: The share of costs that didn’t change is excluded from these densities. The truncated densities are estimated in R through the Bounded Density Estimation bundle utilizing the boundary kernel estimator. To check densities throughout time, they’re normalised to sum to the common share of costs falling and rising respectively throughout the quarter. The yellow line exhibits the pointwise common density over the third quarters of the years 2011–19.

Sources: ONS and authors’ calculations.

We are able to see how, in comparison with this historic common – which we use as a stand-in for pricing behaviour when inflation was near the two% inflation goal – 2022 noticed an enormous variety of costs improve whereas there was little change within the behaviour of the decrease a part of the distribution. Within the newest information, this mass of will increase has begun to subside, and, on the identical time, there’s a rising variety of costs outright falling on the month. Nevertheless, the modal worth improve (that’s, essentially the most possible) continues to be elevated at about 6%, in comparison with roughly 3% on common throughout 2011–19).


To summarise, trying on the micro stage of worth modifications, we discover a seen discontinuity in price-setting within the first quarter of 2022. A wide range of elements, corresponding to the big rise in vitality costs in early 2022, in addition to supply-chain points following Covid lockdowns, possible contributed to this vital change in price-setting dynamics within the UK (relative to any latest historic precedent at the least). On the micro stage, corporations’ pricing selections led to the emergence of a giant rebalancing within the distribution of worth modifications. Instantly, extra costs for a lot of totally different merchandise had been rising on the identical time. In comparison with the out there historical past for these information, the latest interval is exclusive. Extra analysis will probably be wanted on the causes of this marked shift within the distribution of worth modifications, each at a micro and at a macro stage.

Within the very newest information, there may be some proof that the distribution of worth modifications has certainly begun to return within the course of its historic common, although it’s too quickly to ascertain a development.

Lennart Brandt and Natalie Burr work within the Financial institution’s Exterior MPC Unit, and Krisztian Gado is a PhD candidate at Brandeis College.

If you wish to get in contact, please e mail us at bankunderground@bankofengland.co.uk or go away a remark beneath.

Feedback will solely seem as soon as authorised by a moderator, and are solely revealed the place a full title is provided. Financial institution Underground is a weblog for Financial institution of England workers to share views that problem – or assist – prevailing coverage orthodoxies. The views expressed listed here are these of the authors, and are usually not essentially these of the Financial institution of England, or its coverage committees.

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