Inflation and price flexibility

Ivan Petrella, Emiliano Santoro and Yannik Winkelmann

European Economic Review, 2025, vol. 178, issue C

Abstract: Using UK consumer price microdata, we report that aggregate price flexibility varies substantially over time and induces significant non-linearity in inflation. In a regime of high flexibility, the half-life of inflation drops by 50% and its volatility rises considerably. Such asymmetry arises naturally from state-dependent pricing, of which we find ample evidence in the data, particularly following the Great Recession. Neglecting this property may lead to a systematic underprediction of inflation, as seen in the post-pandemic inflation surge. Tracking real-time movements in price flexibility is crucial for assessing inflation dynamics and informing monetary policy decisions.

Keywords: Inflation; Price flexibility; Ss models; State dependence (search for similar items in EconPapers)
JEL-codes: C22 E30 E31 E37 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:178:y:2025:i:c:s0014292125001060

DOI: 10.1016/j.euroecorev.2025.105056

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