The Federal Reserve Board published a research paper using the microdata underlying the U.S. Consumer Price Index to document how firm price-setting behaviour changed during and after the Covid-19 pandemic and to assess what those patterns imply for price-setting models. The analysis finds that price-change frequency rose sharply as inflation accelerated and then declined markedly as inflation receded, alongside evidence that common modelling approaches struggle to replicate key post-pandemic dynamics. In the CPI microdata, the average size of price changes increased as price increases became more common, while the absolute value changed little, and the dispersion of price changes did not fall, contrary to the prediction of state-dependent models. A menu cost model estimated on pre-pandemic pricing data has difficulty matching the post-pandemic increase in price-change frequency, unlike in the high-inflation period of the 1980s; recalibrating the model with smaller menu costs and larger idiosyncratic shocks can match the elevated frequency but not the movements in dispersion. The recalibrated model also implies faster pass-through of shocks to inflation than the version fitted to pre-pandemic data.
Federal Reserve Board 2025-03-28
Federal Reserve Board research finds post-pandemic shift in U.S. price-change frequency and limits of standard menu cost models
The Federal Reserve Board released a research paper analyzing U.S. Consumer Price Index microdata to examine firm price-setting behavior changes during and after the Covid-19 pandemic. The study found increased price-change frequency with inflation acceleration, challenging existing models. Recalibrated models with smaller menu costs and larger idiosyncratic shocks better matched post-pandemic dynamics but struggled with dispersion movements.