What this paper is about
The frequency with which firms change prices is an important component of inflation dynamics.
Find more information about this in the August 2025 Monetary Policy Statement
Earlier New Zealand and international empirical research reviewed in this paper confirm the predictions of theoretical state-dependent pricing models that the frequency of price change by firms varies systematically with inflation.
This paper extends this research by using New Zealand firm-level data spanning 6 decades collected as part of the Quarterly Survey of Business Opinion (QSBO) of the New Zealand Institute of Economic Research (NZIER). These data provide an opportunity to study how the frequency with which firms change prices has evolved across different inflation periods, including the high inflation episodes of the 1970s and 1980s, and the recent post-COVID-19 inflation episode.
Key findings
- The research in this paper reveals that significant changes in pricing behaviour by firms have occurred over recent years. There has been a rise in the tendency for firms to change prices in response to changes in costs and demand as inflation increases, and a fall in the average magnitude of price adjustments.
- An asymmetry in firm price-setting behaviour is also observed. Price increases are more likely than price decreases when firms’ cost and demand conditions change. This phenomenon has become more acute over time. That is, price increases when inflation is high have become more likely, while price decreases have become less likely.
- The paper evaluates possible reasons for the observed changes in pricing behaviour. Increased pricing flexibility and information linked to technology usage may be playing a role in increasing price-setting responsiveness for some firms, including enabling more frequent and smaller magnitude of price adjustments. However, this does not explain why price increases have become more likely while price decreases have become less likely.
- To understand the reasons for this phenomenon, the paper undertakes industry analysis of firm pricing behaviour. This indicates that the observed changes in price-setting behaviour are more apparent amongst firms that are more directly engaged with households.
- The paper discusses possible reasons why this has occurred, including societal changes that may have resulted in less attention given to small price changes.
- The results presented in this paper have potentially important implications for central bank monetary policy decisions, and the speed and extent with which monetary policy may need to react to supply and demand shocks to achieve monetary policy mandates. Moreover, the results imply these conditions may vary with the level of inflation and the direction of these shocks.
- It is important for central banks to adapt macroeconomic models and methods of forecasting inflation to take account of changes in price-setting behaviour and recognise that price-setting behaviour by firms can vary by industry and as general inflation varies.
Why we did this research
Episodes of high inflation in the 1970s and 1980s sparked extensive research on how often and why firms change their prices, showing that when inflation is high, firms are more likely to adjust prices and are quicker to pass through cost increases or strong demand than to cut prices when conditions weaken. After decades of low and stable inflation, the recent surge during COVID-19 has renewed interest in these questions, with a few studies of pricing behaviour in other countries finding that firms changed prices more frequently than in the preceding low-inflation period.
However, it remains unclear from other studies how this recent episode compares with earlier periods of high inflation, which is the more relevant benchmark given that pricing behaviour tends to vary with the level of inflation. This research gap is important considering changes in technology, society, and monetary policy frameworks, and understanding it helps explain how inflation evolves and is central to the optimal design of monetary policy. This paper addresses this gap in the international research literature using a valuable firm-level dataset of New Zealand firms spanning more than 6 decades.
What data have we used?
The empirical results reported in this paper are based on individual firm pricing decisions derived from the NZIER’s Quarterly Survey of Business Opinion (QSBO). This survey has collected information on New Zealand firms’ decisions, the characteristics of each firm and their operating conditions, including changes in costs and demand, on a consistent basis since the early 1960s. Respondent firms represent the building, manufacturing, merchant, and service sectors of the economy, and periodic resampling means the sample characteristics evolve with firm population characteristics.