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Analysis of Inflation/Deflation: Clusters of micro prices matter!

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  • KICHIKAWA Yuichi
  • AOYAMA Hideaki
  • FUJIWARA Yoshi
  • IYETOMI Hiroshi
  • YOSHIKAWA Hiroshi

Abstract

Micro price data show that individual price settings are not time-invariant. Furthermore, the analysis of autocorrelations shows that interactions of micro prices with leads and lags play a significant role in explaining the behavior of aggregate price index. We present a new method of extracting information on the nature of such interactions of micro prices. For Japan's data, we identify two macro shocks—one external and the other domestic—to drive dynamics of prices, but find that irrespective of the sources of shocks, there exists a robust flow of changes of domestic prices from upstream to downstream. Prices change in clusters. We identify such clusters. Our analysis suggests that inertia arising from input/output relationships in production explains the behavior of aggregate prices.

Suggested Citation

  • KICHIKAWA Yuichi & AOYAMA Hideaki & FUJIWARA Yoshi & IYETOMI Hiroshi & YOSHIKAWA Hiroshi, 2018. "Analysis of Inflation/Deflation: Clusters of micro prices matter!," Discussion papers 18055, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:18055
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