How big firms affect inflation
Ivan Yotzov, Nicholas Bloom, Philip Bunn, Paul Mizen, Gregory Thwaites, in this paper, analyze barcode-level price data from 16 advanced and emerging market countries (2005–2022, 2.9 billion transactions) to study how individual firms and product categories contribute to aggregate inflation. The authors decompose inflation into three additive components:
– Macro component: Economy-wide shocks affecting all prices.
– Firm granular residual: The impact of idiosyncratic shocks to individual firms.
– Product category granular residual: The impact of shocks specific to product categories.
Their approach generalizes previous granular residual methods by allowing for multiple, non-nested granular dimensions (firms, categories, retailers) and separating the granular residual into parts due to true idiosyncratic shocks and parts due to differential responsiveness of large firms/categories to common shocks. They use fixed-effects regressions and principal component analysis to estimate these components, weighting by expenditure shares to reflect economic relevance.
Key findings
- In advanced economies, the firm granular residual explains 41% of the variance in aggregate inflation, and the product category granular residual explains another 15%. Most of the firm granular effect comes from idiosyncratic shocks, not just larger firms’ heightened sensitivity to macro shocks. The 10 largest firms alone account for two-thirds of the firm granular component.
- In emerging markets, granular components are less important: together, they account for only 20% of inflation variance, with macro shocks dominating. Granular effects are stronger in countries with more concentrated markets and lower average inflation.
- Retailers also contribute to inflation granularity, especially in advanced economies, though data limitations apply.
- During the 2021–22 inflation surge (post-COVID), granular components became even more important in advanced economies: the firm granular residual accounted for about one-third of inflation, up from 22% pre-2021.
Idiosyncratic shocks to large firms and categories are a major source of inflation fluctuations in advanced economies, especially when market concentration is high and inflation is low. Their importance increases during periods of large shocks, such as the recent global inflation surge. In higher-inflation or less concentrated economies, macro shocks remain the primary driver of inflation.
The granular origins of inflation
Authors: Santiago Alvarez-Blaser, Raphael Auer, Sarah M. Lein, Andrei A. Levchenko
From: Harvard Business School, Bank for International Settlements, University of Basel, University of Michigan
How quickly do firms react to inflation data?
Ivan Yotzov, Nicholas Bloom, Philip Bunn, Paul Mizen, and Gregory Thwaites analyze how UK firms respond to monthly Consumer Price Index (CPI) inflation releases using high-frequency data from the Decision Maker Panel (DMP), a large, representative business survey of UK CFOs and Finance Directors. The analysis distinguishes between responses to changes in headline CPI inflation and to “surprises” (deviations from professional forecasts). The study also constructs a daily “inflation media chatter” index to test the role of media coverage in amplifying firm responsiveness.
Key findings
- Rapid update: Firms update their inflation perceptions and expectations within hours of a new CPI release. The pass-through from CPI inflation to perceptions is about 70% on impact and remains significant over subsequent days.
- Expectations formation: Firms’ own price expectations respond significantly to changes in headline CPI inflation (about 0.3 percentage points increase in expected own-price growth for each 1 percentage point rise in CPI), but not to CPI surprises relative to forecasts.
- Media amplification: Firms are more responsive to CPI changes when media coverage of inflation is elevated, highlighting the media’s role in focusing firm attention on data releases.
- Nonlinear and asymmetric response: Own-price expectations react more to positive CPI changes than negative ones; the effect is stronger in high-inflation periods (2022–2024) and absent in low-inflation periods (2017–2021).
- Anchored medium-term expectations: Firms’ three-year-ahead CPI expectations remain stable and do not respond to monthly CPI changes or surprises, indicating well-anchored medium-term expectations.
The speed of firm response to inflation
Authors: Ivan Yotzov, Nicholas Bloom, Philip Bunn, Paul Mizen, Gregory Thwaites
From: Bank of England, Stanford University, King’s College London, University of Nottingham
A comparison of these two papers
These two papers bridge the structural foundations of inflation with real-world firm behavior.
Structural vs. Behavioral Drivers
- Alvarez-Blaser et al. identify market concentration as a key structural factor, with top 10 firms explaining 41% of inflation variance in advanced economies.
- Yotzov et al. reveal real-time behavioral adjustments, showing firms rapidly update price expectations (0.6pp sensitivity to CPI shocks) when media coverage amplifies inflation signals
Persistence vs. Reactivity
- Alvarez-Blaser et al. explain persistent inflation from firm/product shocks (1.47pp post-COVID contribution).
- Yotzov et al. findings highlight an asymmetric reactivity: firms raise prices faster during inflation spikes but slow adjustments during disinflation.
Policy Implications
- Alvarez-Blaser et al. suggest targeting large firms’ pricing power.
- Yotzov et al. advocate monitoring the media narratives and CPI data releases to anticipate firms’ price-setting shifts.
