By Philip Bunn of the Bank's Structural Economic Analysis Division and Colin Ellis of the Bank's Monetary Analysis Division.
This article discusses recent work at the Bank of England using large databases of individual price quotes to investigate price dynamics in the United Kingdom. Understanding the dynamics of prices is important for policymakers concerned with meeting an inflation target. Based on price quotes underlying ONS aggregate price indices, consumer prices changed, on average, once every five months between 1996 and 2006, while producer prices changed once every four months between 2003 and 2007. Higher frequency supermarket price data covering the period from 2005 to 2008 suggest that prices change more often than this. There are considerable differences in the behaviour of prices between different types of products: for example, goods prices change more often than services prices. The individual price-level data are not clearly supportive of any one theory of price-setting.