Item-level reallocation in price setting during the inflation surge in Austria

Teresa Messner

No 401, Department of Economics Working Paper Series from WU Vienna University of Economics and Business

Abstract: This paper studies whether the rise in price flexibility during Austria's recent inflation surge came from items that were already flexible in normal times or from changes in item-level pricing behavior. Using monthly CPI microdata for core inflation components, I classify items jointly by the frequency and size of their price adjustments and compare inflation contributions across fixed and time-varying classifications. Historically flexible items remain the main source of price adjustments in both directions, but on net they contribute roughly in proportion to their basket share and do not account for the surge. Under the time-varying classification, the high-frequency, high-size group grows from less than a fifth to half of the basket and accounts for most of the increase in inflation. A transition analysis shows that this reflects inflows from previously less flexible groups, mainly on the positive margin, rather than greater persistence. Monthly inflows into this group are also associated with higher subsequent inflation than current inflation alone would imply, although this in-sample relationship rests largely on 2022. The results suggest that price flexibility is state-contingent rather than an invariant item characteristic, so normal-times measures of rigidity may understate price adjustment after large shocks.

Keywords: price setting; price rigidity; state-dependent pricing; inflation dynamics (search for similar items in EconPapers)
Date: 2026-11
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