By Jennifer Greenslade and Miles Parker of the Bank's Structural Economic Analysis Division.
It is important for central banks to understand how companies set prices, since price-setting behaviour plays a key role in the monetary policy transmission mechanism. Surveys of companies have been conducted in a variety of countries to shed light on this issue. Earlier this year the Bank of England asked companies who are contacts of the Bank's Agents about how they set prices. The survey adds to and updates our understanding. It indicates that the frequency with which companies change their prices varies considerably across sectors but that over the past decade a significant number have increased the frequency of price changes. Different factors influence price rises and falls but nearly half of companies change their prices within three months of an increase in costs or a fall in demand.