The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregat Price Data

This paper analyzes the effects of inflation on the dispersion of prices, as well as other aspects of price behavior, using disaggregated data on prices of foodstuffs in Israel during 1978-84. We find that the effect of expected inflation on intramarket price variability is stronger than the effect of unexpected inflation. We show that even in times of high inflation, price quotations are not trivially short and price changes are not synchronized across firms. These facts, taken together, confirm that there is some staggering in the setting of prices. We find that the distribution of real prices is far from being uniform, as many menu cost-based models assume or conclude. In fact, as inflation increases to very high levels, this distribution is not even symmetric. When the annual inflation rate reaches 130 percent, there are equal chances of finding real prices above or below the market average, but upward deviations in the real price are further away from zero than downward ones. Furthermore, as the annual rate of inflation more than doubles from 60 to 130 percent, real prices are pushed toward both tails of the distribution.