IDEAS home Printed from
   My bibliography  Save this paper

Price trends over the product life cycle and the optimal inflation target


  • Adam, Klaus
  • Weber, Henning


We document a new stylized fact for the life-cycle behavior of consumer prices: relative to a narrowly defined set of competing products, the price of individual products tends to fall over the product lifetime. This holds true for more than 90% of the expenditure items underlying the U.K. consumer price index and has important normative implications. Constructing a sticky price model featuring a product life cycle and rich amounts of heterogeneity, we explain how the optimal in ation target can be estimated from the observed trends in relative prices. The optimal inflation target for the U.K. is found to range between 2.6% and 3.2% and to have steadily increased over the period 1996 to 2016. We show how changes in relative price trends contributed to this development.

Suggested Citation

  • Adam, Klaus & Weber, Henning, 2019. "Price trends over the product life cycle and the optimal inflation target," Discussion Papers 32/2019, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:322019

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Daniel Melser & Iqbal A. Syed, 2016. "Life Cycle Price Trends and Product Replacement: Implications for the Measurement of Inflation," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(3), pages 509-533, September.
    2. Carlsson, Mikael & Westermark, Andreas, 2012. "Labor-Market Frictions and Optimal Inflation," Working Paper Series 259, Sveriges Riksbank (Central Bank of Sweden).
    3. Pasten, Ernesto & Schoenle, Raphael & Weber, Michael, 2020. "The propagation of monetary policy shocks in a heterogeneous production economy," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 1-22.
    4. Bilbiie, Florin O. & Fujiwara, Ippei & Ghironi, Fabio, 2014. "Optimal monetary policy with endogenous entry and product variety," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 1-20.
    5. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-583, June.
    6. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Andres Blanco & Mina Kim & Edward S. Knotek & Matthias Paustian & Robert W. Rich & Jane Ryngaert & Raphael Schoenle & Joris Tielens & Michael Weber & Mirko Wiederholt & Tony Zhang, 2019. "Inflation: Drivers and Dynamics 2019 Conference Summary," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2019(22), pages 1-6, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Klaus Adam & Henning Weber, 2020. "Estimating the Optimal Inflation Target from Trends in Relative Prices," CRC TR 224 Discussion Paper Series crctr224_2020_144, University of Bonn and University of Mannheim, Germany.
    2. Klaus Adam & Henning Weber, 2019. "Optimal Trend Inflation," American Economic Review, American Economic Association, vol. 109(2), pages 702-737, February.
    3. Adam, Klaus & Weber, Henning, 2017. "Optimal Trend Inflation," CEPR Discussion Papers 12160, C.E.P.R. Discussion Papers.
    4. Alessandro Cantelmo & Giovanni Melina, 2017. "Sectoral Labor Mobility and Optimal Monetary Policy," IMF Working Papers 2017/040, International Monetary Fund.
    5. Philippe Andrade & Jordi Galí & Hervé Le Bihan & Julien Matheron, 2017. "The Optimal Inflation Target and the Natural Rate of Interest," Working Papers 1009, Barcelona Graduate School of Economics.
    6. Antoine Lepetit, 2017. "The Optimal Inflation Rate with Discount Factor Heterogeneity," Working Papers hal-01527816, HAL.
    7. Ida, Daisuke, 2020. "Sectoral inflation persistence and optimal monetary policy," Journal of Macroeconomics, Elsevier, vol. 65(C).
    8. Tomohide Mineyama & Wataru Hirata & Kenji Nishizaki, 2019. "Inflation and Social Welfare in a New Keynesian Model: The Case of Japan and the U.S," Bank of Japan Working Paper Series 19-E-10, Bank of Japan.
    9. Matthias Meier & Timo Reinelt, 2020. "Monetary Policy,Markup Dispersion, and Aggregate TFP," CRC TR 224 Discussion Paper Series crctr224_2020_161, University of Bonn and University of Mannheim, Germany.
    10. Weber, Henning, 2013. "Learning By Doing in New Firms and the Optimal Rate of Inflation," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79761, Verein für Socialpolitik / German Economic Association.
    11. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    12. Carvalho, Carlos & Nechio, Fernanda, 2018. "Approximating multisector New Keynesian models," Economics Letters, Elsevier, vol. 163(C), pages 193-196.
    13. Pier-Paolo Saviotti & Andreas Pyka¤ & Bogang Jun, 0. "Diversification, structural change, and economic development," Journal of Evolutionary Economics, Springer, vol. 0, pages 1-35.
    14. Hideki Murakami & Yukari Matsuse & Koji Mukaigawa & Yushi Tsunoda, 2013. "Product lifecycle and choice of transportation modes: Japan' s evidence of import and export," Discussion Papers 2013-28, Kobe University, Graduate School of Business Administration.
    15. Masashige Hamano & Pierre M. Picard, 2017. "Extensive and intensive margins and exchange rate regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 804-837, August.
    16. Andrea Ferrero & Mark Gertler & Lars E. O. Svensson, 2007. "Current Account Dynamics and Monetary Policy," NBER Chapters, in: International Dimensions of Monetary Policy, pages 199-244, National Bureau of Economic Research, Inc.
    17. Vlieghe, Gertjan W, 2007. "Imperfect credit markets: implications for monetary policy," MPRA Paper 12957, University Library of Munich, Germany.
    18. Wang, Liang & Tan, Justin & Li, Wan, 2018. "The impacts of spatial positioning on regional new venture creation and firm mortality over the industry life cycle," Journal of Business Research, Elsevier, vol. 86(C), pages 41-52.
    19. Sofie Balcaen & Sophie Manigart & Hubert Ooghe, 2011. "From distress to exit: determinants of the time to exit," Journal of Evolutionary Economics, Springer, vol. 21(3), pages 407-446, August.
    20. Siami-Namini, Sima & Hudson, Darren & Trindade, A. Alexandre & Lyford, Conrad, 2018. "Commodity Prices, Monetary Policy and the Taylor Rule," 2018 Annual Meeting, February 2-6, 2018, Jacksonville, Florida 266719, Southern Agricultural Economics Association.

    More about this item


    Optimal Inflation Rate; Product Life Cycle; U.K. Micro Price Data;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bubdps:322019. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - Leibniz Information Centre for Economics). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.