State and Time-Dependent Pricing

Philip Bunn, Nicholas Bloom, Craig Menzies, Paul Mizen, Gregory Thwaites and Ivan Yotzov

No 34666, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present new evidence on how firms set prices using direct questions from a large, economy-wide survey of UK firms. Since 2023, 54% of firms report setting prices in a state-dependent manner, as opposed to changing prices at fixed intervals. In contrast, 44% of firms used state-dependent pricing in 2019. Smaller firms, those with a higher share of non-labour costs, and those reporting higher subjective uncertainty around sales and prices are more likely to be state-dependent. We then analyse the implications of price-setting behaviour for inflation dynamics. State-dependent firms experienced a sharper increase in price growth over 2022-2023, and also a faster subsequent decline. Using evidence from a randomised survey experiment, firm-level forecast errors, and local projections, we show that prices of state-dependent firms respond faster to cost shocks. The difference between state-dependent and time-dependent firms is furthermore larger for bigger shocks, consistent with theoretical predictions.

JEL-codes: C83 D22 D84 E31 (search for similar items in EconPapers)
Date: 2026-01
Note: ME
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