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[2020-5] Corporate Price Adjustment Behavior Under Low-inflation Environment

Group : Articles in Monthly Bulletin
조사총괄팀 (02-759-4254) 2020.05.27 232

Individual companies’ price adjustment behavior can vary depending on the inflation level. This is because in the event of a cost increase or other factors driving up prices they tend to decide the frequency or size of their price change differently, in reflection of inflation developments and the structure and degree of market competition. This paper examines whether there has been any change in companies’ price adjustment behavior under the continuing low-inflation environment.

 

An analysis of the frequency and size of adjustments in prices of 150 daily necessities using weekly data (collected by Korea Consumer Agency) between January 2014 and September 2019 shows the following characteristics: First, the frequency of price adjustments, indicating the proportion of products whose prices have changed in the relevant month, has declined gradually since 2015, and the pace of decline accelerated entering 2019. Second, for products whose prices have changed, the monthly average rate of price increases or cuts relative to the previous prices showed a rising trend, unlike the adjustment frequency, which implies that companies tend to adjust prices to a greater extent than they did in the past. Third, a breakdown of the monthly price increase rate into the contributions of the frequency and size of price adjustments shows that the price increase rate has been more closely associated with the frequency than with the size since 2017. Fourth, results of an empirical analysis of corporate price adjustment behavior relative to inflation levels show that lower inflation is associated with less frequent but larger price adjustments.

This implies that in the low-inflation environment companies tend to delay reflecting factors pushing up prices, including cost increases, in their prices, and to make a large adjustment when they do make one. The fact that inflation affects corporate price adjustment behavior provides micro-evidence for a possibly ongoing change in the relation between economic conditions and inflation, with the reduced impact of economic changes on inflation being one example. However, given that this analysis covers only a limited number of products due to data constraints, a more comprehensive conclusion would require further study based on wide-ranging price data, including those for service sectors.

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