Bank of England working paper finds 54% of UK firms now use state-dependent pricing, with faster pass-through of large cost shocks

The Bank of England has published a staff working paper presenting new survey evidence on how UK firms set prices and what that means for inflation dynamics. Using the Decision Maker Panel survey, the paper finds that 54% of firms on average since 2023 have set prices in a state-dependent way, meaning they change prices in response to events, compared with 44% in 2019. The research concludes that these firms saw a sharper rise in price growth in 2022 to 2023 and a faster decline afterward, indicating that inflation reacts more quickly when shocks are large. State-dependent pricing is more common among smaller firms, firms with higher non-labour cost shares, goods-producing sectors and firms reporting greater uncertainty around sales, prices and costs. The paper also finds that the frequency of price changes rose from an estimated 22% of prices changing each month in 2019 to 36% in 2022, easing to about 31% in 2025, with the sustained increase largely driven by state-dependent firms. Evidence from a randomized survey experiment, firm-level forecast errors and local projections using oil and gas supply shocks shows that state-dependent firms pass cost shocks through to prices more strongly than time-dependent firms, with the gap widening for bigger shocks and time-dependent firms catching up only over longer horizons. The paper estimates that state-dependent pricing added about 1 percentage point to aggregate output price inflation at its peak near the end of 2021 relative to a scenario in which all firms were time-dependent.