Consumer price-setting behaviour: evidence from food CPI microdata

This paper studies the price-setting behaviour in food products, using the microdata underlying the Portuguese Consumer Price Index (CPI). We document that, in each month, about 1 in 4 food items changed prices compared to the previous month, including promotions and sales. If these temporary price changes are excluded, the frequency drops to 1 out of 5, on average. Positive price changes were more frequent but had lower magnitudes than negative ones. There were strong heterogeneities in price-setting not only across products but also across industries and outlets. We find that, from 2009 to 2019, food inflation was primarily driven by the relative frequency of positive versus negative price changes, rather than changes in their size, consistent with standard New Keynesian calibrations of price rigidity. Finally, we report that price changes were more frequent at the producer than at the consumer level, but with a lower magnitude. Taken together, these results highlight that the frequency margin is the key driver of inflation dynamics and provide micro evidence supporting widely used macroeconomic calibrations of price rigidity.