What this paper is about
This Analytical Note uses the price-setting modules of Stats NZ's Business Operations Survey — run in 2010 and 2022 — linked to administrative firm records in the Longitudinal Business Database. The 2 surveys were conducted in very different inflation environments:
- the subdued period after the Global Financial Crisis
- the inflation surge that followed the COVID-19 pandemic.
The Note separates price-setting into 2 stages: price reviews and price changes.
It examines how the frequency of each varies with factors such as firm size, industry, and the drivers firms themselves report as important for their pricing decisions.
Key findings
- New Zealand firms changed prices more frequently in 2022 than in 2010. The share of firms changing prices twice or more a year rose from 38% to 46%. In 2010, the typical firm reviewed prices twice a year but changed them only once; by 2022, the typical firm both reviewed and adjusted prices twice a year.
- This increase in frequency was concentrated at the adjustment stage rather than the review stage. The frequency of price reviews was broadly stable between 2010 and 2022. Firms responded to the high-inflation environment in 2022 by acting on a greater share of their existing price reviews, rather than by monitoring and reviewing prices more often.
- Firm size and industry are associated with substantial and persistent differences in how frequently firms review and change prices, evident in both surveys despite the very different inflation environments. Larger firms change prices more frequently than smaller firms, and the gap widens as firm size increases. Firms in wholesale and retail trade change prices more frequently than those in other industries, while business and government services change prices less frequently.
- The shifts in pricing behaviour in 2022 were concentrated among firms most exposed to input cost pressures. Manufacturing recorded the largest increase in price-change frequency, with transport and utilities also changing prices much more frequently than in 2010. Smaller firms were generally more responsive than larger firms.
- How firms set prices matters as much as the conditio
- ns they face. Cost-plus pricing — the most common method used by 62% of firms in 2022, up from 50% in 2010 — is associated with the most active price adjustment. Long-term contracts are a significant source of price rigidity. Firms that focus on current economic conditions reprice more frequently than firms that incorporate expectations about the future, consistent with a largely reactive style of price setting.
- Firms that rate labour costs as an important pricing factor tend to review and change prices less frequently, while firms that emphasise other input costs, demand, stock levels, or competitors' prices tend to reprice more frequently.
Why we did this research
Firms' price-setting decisions are the proximate determinant of inflation, and consequently they determine how quickly factors such as input costs and demand pressures pass through to consumer prices. Understanding price-setting behaviour is therefore central to interpreting inflation and setting monetary policy.
Knowing which firms changed their pricing behaviour between the 2 surveys, and in what way, helps us interpret inflation developments. Distinguishing the review stage from actual price changes also helps identify where price-setting behaviour shifted.
What data have we used?
The results in this paper are based on Stats NZ's Business Operations Survey, an annual survey of private businesses with 6 or more employees. The price-setting module was included in 2010 and 2022.
The survey is drawn from a population of roughly 35,000 to 45,000 eligible firms, and responses are linked to administrative records in the Longitudinal Business Database, which provides consistent measures of firm size and industry.