Five facts about prices

Emi Nakamura and Jon Steinsson from Harvard University present Five Facts About Prices: A Reevaluation of Menu Cost Models (PDF):

We establish five facts about prices in the U.S. economy:

1) The median duration of consumer prices when sales are excluded at the product level is 11 months. The median duration of finished goods producer prices is 8.7 months.
2) Two-thirds of regular price changes are price increases.
3) The frequency of price increases responds strongly to inflation while the frequency of price decreases and the size of price increases and price decreases do not.
4) The frequency of price change is highly seasonal: It is highest in the 1st quarter and lowest in the 4th quarter.
5) The hazard function of price changes for individual consumer and producer goods is downward sloping for the first few months and then flat (except for a large spike at 12 months in consumer services and all producer prices).

These facts are based on CPI microdata and a new comprehensive data set of microdata on producer prices that we construct from raw production files underlying the PPI. We show that the 1st, 2nd and 3rd facts are consistent with a benchmark menu-cost model, while the 4th and 5th facts are not.

Comments

[spencer]

In a low inflation world firms tend to raise prices once a year, typically at the start of the year.

So if you look at not seasonally adjusted core cpi you find that over half of the annual increase occurs in the first quarter. Another bulge occurs in the third quarter when about a quarter of the annual price increase occurs as autos, tutition and home prices rise sharply.

Over the last 3 years the first quarter accounted for 77%, 60% and 66% of the total increase in the core cpi.

This implies that when you get to the later part of the year the core cpi numbers are pretty much meaningless until you can see what happens in the first quarter.

Remember, a year ago the fed and everyone was very happy with how little of the oil price incrrease were being passed through, but once the first quarter data was released that judgement had to be reversed.

I can send you a file of this if you are interested.

[A. PERLA]

spencer: "Remember, a year ago the fed and everyone was very happy with how little of the oil price incrrease were being"

It is interesting that you note the seasonality of the data.

Elsewhere on this blog, we have discussed the news coverage of economic fact (and trivia). Journalism is the business of selling print. There is a production deadline, after which the "news" (look at the root of this word) is useless.

So, some media outlets print/video will often produce just about anything hoping that it will be gobbled by the unthinking masses. And, more often than not, that is exactly happens.

[Laurent GUERBY]

Some funny things about why inflation raw data is kept secret:

http://www.eurotrib.com/story/2006/11/20/143350/23

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