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The speed of firm response to inflation

Author

Listed:
  • Yotzov, Ivan

    (Bank of England)

  • Bloom, Nicholas

    (Stanford University)

  • Bunn, Philip

    (Bank of England)

  • Mizen, Paul

    (King’s College London)

  • Thwaites, Gregory

    (University of Nottingham)

Abstract

This paper analyses the response of firms to monthly CPI inflation releases using high-frequency data from a large economy-wide business survey. CPI inflation perceptions respond very quickly, in a matter of hours after the release. We also find that firms’ expected own-price growth has a strong positive correlation with changes in CPI inflation, particularly for increases in inflation. This sensitivity is stronger when inflation is high. Firms are also more responsive when inflation coverage in the media is elevated and appear to have had a supply-side view of the economy since 2022: higher aggregate inflation leads to lower expected sales volume growth and higher expected cost growth. Firms also seem to anticipate the monetary policy response, as positive inflation changes are associated with higher expected borrowing rates.

Suggested Citation

  • Yotzov, Ivan & Bloom, Nicholas & Bunn, Philip & Mizen, Paul & Thwaites, Gregory, 2024. "The speed of firm response to inflation," Bank of England working papers 1085, Bank of England.
    • Handle: RePEc:boe:boeewp:1085
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; inflation expectations; survey data; firms;
    All these keywords.

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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