Working Paper No. 395
By Jennifer Greenslade and Miles Parker
It is important to understand how companies set prices, since price-setting behaviour plays a key role in the monetary policy transmission mechanism. Many surveys have been conducted in a range of countries to shed light on this issue by asking companies directly about how they set prices. This paper reviews the results of a new survey of the price-setting behaviour by the Bank of England of around 700 UK firms. In terms of how companies set prices, the survey evidence supported the use of the mark-up over costs form of pricing. Firms reviewed prices more frequently than actually changing them, with the median firm changing price only once per year, but the frequency with which companies changed their prices varied considerably across sectors. Over the past decade a significant number of firms had increased the frequency of price changes. Different factors influenced price rises and price falls. Higher costs - in particular, labour costs and raw materials - were the most important driver behind price rises, whereas lower demand and competitors’ prices were the main factor resulting in price falls. Nearly half of firms changed their prices within three months of an increase in costs or a fall in demand.