Firms quicker to raise prices than cut them during high inflation, RBNZ research finds

New Reserve Bank research shows Kiwi firms have become more likely to increase prices during periods of high inflation and are less likely to cut them when costs fall.

Reserve Bank chief economist Paul Conway unveiled the research at a speech in Wellington on Tuesday.

Conway said advances in digital technology had made it cheaper and easier for firms to change prices, allowing them to respond more quickly to shifts in inflation expectations.

“Price-setting has become more asymmetric, with firms quicker to pass through rising costs than to reverse price increases as inflation recedes,” Conway said.

Conway said cost pressures were the main reason businesses passed on costs, with 90 percent of firms citing labour and other input costs as key.

RNZ asked Conway why firms were quicker to raise prices than cut them during inflation spikes.

He said that was not something they could easily answer and they were undertaking further research on the matter.

He did, however, have some views on how competition affected firms’ pricing decisions.

“Pricing decisions are shaped less by the number of competitors they face and more by the prices those competitors charge and the willingness of customers to shop around and switch suppliers. In New Zealand, where competitive pressures are weak in some markets, firms may be relatively less constrained in lifting prices,” he said.

Conway said the findings suggested cost shocks may now pass through and become embedded in inflation more quickly than in the past and they also highlighted how quickly firms could adapt and change their behaviour when cost pressures persisted.

He said this “reinforces the importance of keeping inflation expectations anchored and closely monitoring price-setting behaviour to assess the likely persistence of inflation and the appropriate stance of monetary policy”.