Inflation and Price Flexibility

Ivan Petrella, Emiliano Santoro () and Yannik Winkelmann ()
Additional contact information
Emiliano Santoro: Catholic University of Milan
Yannik Winkelmann: University of Tubingen

No 99, Working papers from Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino

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, for 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 to inform monetary policy decisions.

Keywords: Inflation; Price flexibility; Monetary policy; Ss models (search for similar items in EconPapers)
JEL-codes: C22 E30 E31 E37 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2025-05
New Economics Papers: this item is included in nep-cba and nep-mon
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