Inflation and Price Dispersion: New Cross-Sectoral and International Evidence

This paper investigates the relationship between price dispersion and inflation, shedding light on one major source of the cost of high inflation. By analyzing novel product-level web-scraped data from over 60,000 restaurants and supermarkets across 18 countries facing high and low inflation periods, I uncover new evidence of a significant positive correlation between inflation and price dispersion. My findings reveal that average annualized inflation, ranging between 0 and 20 percentage points across countries within a condensed time frame, is significantly associated with higher price dispersion in both the restaurant and the supermarket sectors. The estimates indicate that the marginal effect of suboptimal inflation on product-level distortions is positive, economically significant in all inflation environments and heterogeneous across sectors. Cross-sectionally, I find that as annualized inflation rises from 0% to 10% inefficient price dispersion is about 46% higher for supermarkets and 73% higher for restaurants. Lastly, the relationship between inflation and price dispersion does not flatten much at higher inflation, so that the marginal cost of additional inflation does not vanish as inflation rises – a pattern standard menu-cost models do not generate. This indicates a sustained impact of inflation on price dispersion, implying that accommodating higher inflation levels incurs substantial welfare costs.