How Do Firms Adjust Prices in a High Inflation Environment?

Wändi Bruine de Bruin (), Keshav Dogra, Sebastian Heise, Edward Knotek, Brent Meyer, Robert Rich, Raphael Schoenle, Giorgio Topa and Wilbert van der Klaauw

No 20230602, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: How do firms set prices? What factors do they consider, and to what extent are cost increases passed through to prices? While these are important questions in general, they become even more salient during periods of high inflation. In this blog post, we highlight preliminary results from ongoing research on firms’ price-setting behavior, a joint project between researchers at the Federal Reserve Banks of Atlanta, Cleveland, and New York. We use a combination of open-ended interviews and a quantitative survey in our analysis. Firms reported that the strength of demand was the most important factor affecting pricing decisions in recent years, while labor costs and maintaining steady profit margins were also highly important. Using three methodological approaches, we consistently estimate a rate of cost-price passthrough in the range of 60 percent for the representative firm over 2022-23—with considerable heterogeneity in this number across firms.

Keywords: inflation; Price level; Price-setting; decision making; microeconomics (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 2023-06-02
New Economics Papers: this item is included in nep-mon
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