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Price-Setting During the Covid Era

Hugh Montag and Daniel Villar


Using the micro data underlying the U.S. CPI, we document several findings about firm price-setting behavior during the Covid-19 pandemic, a period with the highest levels of inflation seen in over thirty years. We present three sets of preliminary results:

1) firms primarily adjusted to the pandemic through the intensive margin by altering the size of price changes. In contrast, the frequency of price change changed comparatively little during this period. The dispersion of price changes rose in early 2020, before falling and remaining low throughout 2021. 2) The between-sector variance of price changes rises at various points during the pandemic, which indicates the presence of sectoral shocks. We do not find a relationship between sectoral pre-pandemic flexibility and how quickly firms adjusted to economic shocks during the pandemic. 3) Changes in inflation are substantially driven by changes in the share of price increases relative to the share of price declines. The share of price increases rose in 2021 even as the absolute value of all price changes remained flat. Some of our findings are consistent with time-dependent pricing models, while other patterns are more consistent with state-dependent pricing models in a low inflation environment.