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Micro and Macro Cost-Price Dynamics in Normal Times and During Inflation Surges

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Abstract

We develop a unified approach to studying cost-price dynamics in the cross-section of firms in order to jointly explain the time series of aggregate inflation and the frequency of price changes, both during normal times and inflation surges. A key novelty is the use of microdata on firms’ prices and production costs to construct an empirical measure of price gaps—the deviation between a firm’s listed and optimal price. Conditional on the path of aggregate cost shocks extracted from the data, a state-dependent pricing model with strategic complementarities accounts well for both the linear cost-price dynamics of the pre-pandemic period and the nonlinear increase in inflation and frequency of price adjustment that followed.

Suggested Citation

  • Luca Gagliardone & Mark Gertler & Simone Lenzu & Joris Tielens, 2026. "Micro and Macro Cost-Price Dynamics in Normal Times and During Inflation Surges," Staff Reports 1195, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:103257
    DOI: 10.59576/sr.1195
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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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