The Bank of England published a staff working paper presenting new evidence on “intertemporal pass-through” (iPT), defined as how strongly firms’ desired prices respond to changes in their expected future marginal costs. Using UK firm-level survey data and a natural experiment around the March 2019 announcement of a future tariff schedule in the event of a ‘No-Deal’ Brexit, the paper finds that firms’ price setting can be materially forward-looking and that differences in pricing behaviour across firms can amplify the immediate inflation impact of announcements about future policies. Empirically, the authors construct firm-level “news shocks” to expected future costs by combining sectoral variation in implied tariff changes with Decision Maker Panel data on firms’ perceived probability of a no-deal outcome and their EU-imported input cost shares. iPT is estimated to be larger for firms with longer average price durations and for firms that expect the cost shock to arrive sooner, while being smaller for firms characterised as more state-dependent in their pricing and for larger expected cost shocks. On the modelling side, a framework with heterogeneous adjustment frequencies and perceived shock horizons is used to reconcile the cross-sectional patterns, and the paper shows that aggregate inflation’s sensitivity to anticipated future costs is convex in non-adjustment frequencies and perceived shock horizons, implying that iPT heterogeneity increases the forward-lookingness of macroeconomic aggregates. The paper is published as part of the Bank’s Staff Working Papers series to elicit comments and further debate and does not represent Bank of England policy.

Original source View in tracker