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Inflation and Price Flexibility

Author

Listed:
  • Petrella Ivan

    (Department of Economics, Social Studies, Applied Mathematics and Statistics, and Collegio Carlo Alberto, University of Turin; University of Warwick and CEPR)

  • Santoro Emiliano

    (Catholic University of Milan)

  • Winkelmann Yannik

    (University of Tubingen)

Abstract

Using UK consumer price microdata, we report that aggregate price flexibility varies substantially over time and induces significant non-linearity in inflation. In a regime of high flexibility, the half-life of inflation drops by 50% and its volatility rises considerably. Such asymmetry arises naturally from state-dependent pricing, for which we find ample evidence in the data, particularly following the Great Recession. Neglecting this property may lead to a systematic underprediction of inflation, as seen in the post-Pandemic inflation surge. Tracking real-time movements in price flexibility is crucial for assessing inflation dynamics and to inform monetary policy decisions.

Suggested Citation

  • Petrella Ivan & Santoro Emiliano & Winkelmann Yannik, 2025. "Inflation and Price Flexibility," Working papers 099, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    • Handle: RePEc:tur:wpapnw:099
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    File URL: https://www.bemservizi.unito.it/repec/tur/wpapnw/m99.pdf
    File Function: First version, 2025
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    More about this item

    Keywords

    Inflation; Price flexibility; Monetary policy; Ss models;
    All these keywords.

    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
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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