Source: Reserve Bank of New Zealand
4 August 2025 – How businesses set prices for their goods and services is a key driver of inflation and how long it will last into the future.
To better understand the price-setting behaviour of firms, new research by the Reserve Bank of New Zealand looked at how well two kinds of measures of price-setting behaviour – from surveys and from models based on recent data – help explain actual inflation.
“When explaining and forecasting domestic or non-tradables inflation, modelled measures of price-setting behaviour perform better than survey-based measures,” the Analytical Note authors Ross Kendall and Marea Sing say.
Modelled measures that are more sensitive to recent inflation are better for forecasting domestic or non-tradable inflation than those that are not, the research found.
In other words, businesses are more likely to change their prices based on the inflation they experienced recently, rather than the inflation they experienced several years ago. Recent inflation also has more influence on price setting behaviour than expectations of future inflation.
However, the various measures of price-setting behaviour are not significantly different from each other and it is best to consider all measures when explaining and forecasting inflation. This is especially true as price-setting behaviour can change over time.
This research can help the Monetary Policy Committee make judgements about the inflation outlook and where to set the Official Cash Rate.
“These judgements about price-setting behaviour are particularly important following episodes of high or low inflation, as they influence how persistent the effects of these periods will be and how quickly inflation is likely to return to the 2% target midpoint,” the Note says.
Read Analytical Note: https://govt.us20.list-manage.com/track/click?u=bd316aa7ee4f5679c56377819&id=497e1bed1c&e=f3c68946f8
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Analytical Note key findings
Price-setting behaviour describes how firms dynamically adjust their prices based on past and expected future inflation. Price-setting behaviour plays a key role in the inflation process, in particular, influencing how persistent inflation t
