Working Paper: CEPR ID: DP18126
Authors: Peter Karadi; Juergen Amann; Javier Sánchez Bachiller; Pascal Seiler; Jesse Wursten
Abstract: We compare supermarket price setting in the US and the euro area and assess its impact on food inflation. We introduce a novel scanner dataset of Germany, the Netherlands, France, and Italy (EA4) and contrast it with an equivalent dataset from the US. We find that both higher frequency and stronger state dependence of price changes contribute to higher flexibility of supermarket inflation in the US relative to the euro area. We argue that the driving force behind both factors is higher cross-sectional volatility in the US. Larger product-level fluctuations both force retailers to adjust prices more frequently and increase price misalignments, which increase the selection of large price changes. Both facts are well represented by a mildly state-dependent price-setting model, and they jointly explain over a third of the difference in food-inflation volatility between the US and the euro area as well as around a third of the difference between the inflation responses to the COVID-19 shock in Germany and Italy.
Keywords: food inflation; COVID-19; state-dependent pricing; generalized hazard function; duration hazard function; US and euro-area comparison
JEL Codes: E31; E32; E52; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher frequency and stronger state dependence of price changes (E39) | higher flexibility of supermarket inflation (E31) |
| higher cross-sectional volatility in the US (N22) | larger product-level fluctuations (E39) |
| larger product-level fluctuations (E39) | more frequent price adjustments (D49) |
| larger product-level fluctuations (E39) | higher likelihood of large price changes (E30) |
| higher likelihood of large price changes (E30) | higher flexibility of supermarket inflation (E31) |
| state dependence (C62) | aggregate price flexibility (C43) |
| higher volatility of product-level shocks in the US (N12) | more dispersed density of price misalignments (D39) |
| more dispersed density of price misalignments (D39) | key difference in state dependence (H73) |
| state dependence (C62) | underestimation of price flexibility in popular models (C54) |
| duration hazard of reference price changes (C41) | increasing in both regions (R11) |