Post-Pandemic Price Flexibility in the U.S.: Evidence and Implications for Price Setting Models

Using the micro data underlying the U.S. CPI, we document several findings about firm price-setting behavior during and following the Covid-19 pandemic, a period with the highest levels of inflation seen in around forty years. 1) The frequency of price change increased substantially as inflation took off, and has declined markedly as inflation has receded. 2) The average size of price changes also increased as price increases became more common, while the absolute value changed little. 3) The dispersion of price changes did not fall, contrary to the prediction of state-dependent models. 4) A menu cost model fitted on pre-pandemic pricing data has difficulty matching the increase in the frequency of price changes post-pandemic, which was not the case for the high inflation period of the 1980s. A re-calibrated menu cost model with smaller menu costs and larger idiosyncratic shocks can match the elevated frequency seen in the post-pandemic period, but not the movements in the dispersion of price changes. Such a model also implies a faster pass-through of shocks to inflation than the model fitted to pre-pandemic data.