Companies take six months longer to cut prices in response to falling costs than they do to increase them when their costs rise, according to new research that underscores fears over ‘sticky’ inflation.
Bank of England researchers, using pre-pandemic data, highlighted evidence of manufacturers, restaurants and hotels behaving in this way.
It suggests that the inflationary pressures caused by high food and energy prices might still be having an effect for some time, even as wholesale prices fall – which could prove a headache for the Bank of England’s interest rate setters.
The findings chime with concerns expressed by the Bank’s chief economist Huw Pill last week as he said that the Old Lady of Threadneedle Street must ‘see the job through’ in battling inflation – even if higher rates risk damaging job security and economic growth.
Inflation is coming down, having hit 11.1 per cent in October last year. The latest figures show the increase in the Consumer Price Index fell to 6.8 per cent in the year to July, and it is projected to slide further over coming months.
Struggle: Inflationary pressures caused by high food and energy prices might still be having an effect for some time, even as wholesale prices fall
But the worry expressed by Pill and other members of the Bank’s rate-setting Monetary Policy Committee is that underlying inflationary pressures are proving tougher to squash, despite the committee’s nine members raising the base rate 14 times since December 2021 to its current 5.25 per cent.
One concern is that, while the direct impact of rising food and energy costs on consumers has started to fade, it is still working its way through supply chains.
And companies that have been squeezed might want to rebuild profit margins as those costs fall.
In their research, published on the unofficial Bank Underground blog, economists Hela Mrabet and Jack Page found that the ‘pass through’ of energy supply chain shocks had boosted headline inflation by 1 percentage point at its peak at the end of last year.
They also calculated that so-called ‘input’ shocks are passed through with an average ‘lag’ of two financial quarters – six months – when costs are going down versus when they are going up.
‘The results show that energy and food effects through the supply chain have had a sizeable contribution to inflation over the past year,’ the study found.
The disparity between ‘passing on cost shocks coming down (slower) versus going up (faster)’ might mean those effects are still ‘a source of persistence over the next 12 months as firms try to rebuild their margins’, the researchers found.
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