Shifts in Australian Price-setting Behaviour around Large Shocks

Matthew Fink and Jonathan Hambur
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Matthew Fink: Reserve Bank of Australia
Jonathan Hambur: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: The sharp rise in inflation following the COVID-19 pandemic has renewed interest in how firms adjust prices after large economic shocks and the implications for modelling inflation and setting monetary policy. Using a large dataset of web-scraped Australian retail prices, we document an increase in the frequency of price changes in 2022 and 2023, alongside strong goods price inflation. We incorporate these microdata-based estimates of price-setting frequency into the Reserve Bank of Australia's dynamic stochastic general equilibrium model to assess their macroeconomic implications. We find that failing to account for higher rates of price adjustment during the high-inflation period leads to inflation forecasts that are up to 1.2 percentage points too low, even when the underlying shocks are known. The increase in the frequency of price resets also steepens the Phillips curve, reducing the policy trade-off between inflation and output. Given knowledge of this change in price-setting behaviour, a hypothetical central bank with unchanged preferences would tend to raise interest rates more aggressively than in a scenario where price rigidity was stable. Our findings highlight the importance of accounting for shifts in price-setting behaviour when interpreting inflation and setting monetary policy.

Keywords: inflation; price setting; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 2026-05
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2026-02

DOI: 10.47688/rdp2026-02

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