On the Source of Seasonality in Price Changes: The Role of Seasonality in Menu Costs

Seasonality is among the most salient features of price changes, but it is notably less analyzed than seasonality of quantities and the business cycle component of price changes. To fill this gap, we use the scanner data of 199 categories of goods in Japan to empirically study the seasonality of price changes from 1990 to 2021. We find that the following four features generally hold for most categories: (1) The frequency of price increases and decreases rises in March and September; (2) Seasonal components of the frequency of price changes are negatively correlated with those of the size of price changes; (3) Seasonal components of the inflation rate track seasonal components of net frequency of price changes; (4) The seasonal pattern of the frequency of price changes is stable relative to that of the size of price changes. The pattern is, however, responsive to changes in the category-level annual inflation rate for the year. We conduct a simulation analysis using a simple state-dependent price model and show seasonal cycles in menu costs play an essential role in generating seasonality of price changes in the data. We then discuss the nature of seasonal cycles in menu costs and their implications for macroeconomic dynamics.