Bank for International Settlements working paper finds firm-level shocks explain 41% of inflation variance in advanced economies

The Bank for International Settlements has published a working paper analysing barcode-level retail price data across 16 advanced and emerging market economies to assess how much aggregate inflation reflects “granular” firm and product-category factors versus macroeconomic shocks. Using data from 2005–2022, the paper finds that in advanced economies the firm granular residual explains 41% of the variance of overall inflation, while the product category granular residual explains a further 15%, with the macro component accounting for 44% over 2005–2020. The analysis is based on around 2.9 billion transactions and a decomposition that separates inflation into a macro (country-time) component and residual components linked to firm-country and product-category-country shocks. In advanced economies, most of the firm granular residual is driven by idiosyncratic shocks rather than larger firms having higher sensitivity to common shocks, and two-thirds of the firm component is attributed to the 10 largest firms. Granular residuals are less important in economies with less concentrated market shares and higher inflation, including emerging markets where the firm and category components combined account for 20% of inflation variance. The paper also links granular forces to the post-COVID inflation surge, with the firm-level component contributing about 1.47 percentage points of average 3.91% inflation in advanced economies during 2021–2022, and reports an additional retailer dimension analysis in which the retailer granular residual accounts for 17% of inflation variance in advanced economies and 14% in emerging markets.