Analysis of Inflation/Deflation: Clusters of micro prices matter!

         
Author Name KICHIKAWA Yuichi (Niigata University) / AOYAMA Hideaki (Faculty Fellow, RIETI) / FUJIWARA Yoshi (University of Hyogo) / IYETOMI Hiroshi (Niigata University) / YOSHIKAWA Hiroshi (Faculty Fellow, RIETI)
Creation Date/NO. August 2018 18-E-055
Research Project Large-scale Simulation and Analysis of Economic Network for Macro Prudential Policy
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Abstract

Micro price data show that individual price settings are not time-invariant. Furthermore, the analysis of autocorrelations shows that interactions of micro prices with leads and lags play a significant role in explaining the behavior of aggregate price index. We present a new method of extracting information on the nature of such interactions of micro prices. For Japan's data, we identify two macro shocks—one external and the other domestic—to drive dynamics of prices, but find that irrespective of the sources of shocks, there exists a robust flow of changes of domestic prices from upstream to downstream. Prices change in clusters. We identify such clusters. Our analysis suggests that inertia arising from input/output relationships in production explains the behavior of aggregate prices.