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This research investigates how firms set prices and the implications for inflation dynamics in the UK.

January 15, 20260 citationsOpen Access

State and Time-Dependent Pricing

PBPhilip BunnBank of England NBNick BloomNational Bureau of Economic Research CMCraig MenziesGlasgow Life

Key Points

This research investigates how firms set prices and the implications for inflation dynamics in the UK.
Conducted a large survey of UK firms focusing on pricing strategies.
Analyzed differences in pricing behavior between state-dependent and time-dependent firms.
Employed a randomized survey experiment and firm-level forecast errors to assess price response to cost shocks.
54% of firms now use state-dependent pricing, up from 44% in 2019.
State-dependent firms show faster price growth and quicker decline post-2022-2023.
Response to cost shocks is more pronounced in state-dependent firms, particularly with larger shocks.

Abstract

NBER Working Paper No. w34666 62 Pages Posted: 12 Jan 2026 Bank of England Stanford University - Department of Economics; National Bureau of Economic Research (NBER) Bank of England King’s College London - King's Business School University of Nottingham Bank of England Date Written: January 2026 We present new evidence on how firms set prices using direct questions from a large, economy-wide survey of UK firms. Since 2023, 54% of firms report setting prices in a state-dependent manner, as opposed to changing prices at fixed intervals. In contrast, 44% of firms used state-dependent pricing in 2019. Smaller firms, those with a higher share of non-labour costs, and those reporting higher subjective uncertainty around sales and prices are more likely to be state-dependent. We then analyse the implications of price-setting behaviour for inflation dynamics. State-dependent firms experienced a sharper increase in price growth over 2022-2023, and also a faster subsequent decline. Using evidence from a randomised survey experiment, firm-level forecast errors, and local projections, we show that prices of state-dependent firms respond faster to cost shocks. The difference between state-dependent and time-dependent firms is furthermore larger for bigger shocks, consistent with theoretical predictions. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org . Suggested Citation: Suggested Citation Threadneedle Street London, EC2R 8AH United Kingdom Landau Economics Building, Room 231 579 Serra Mall Stanford, CA 94305-6072 United States 650-725-7836 (Phone) HOME PAGE: http://economics.stanford.edu/faculty/bloom 1050 Massachusetts Avenue Cambridge, MA 02138 United States 150 Stamford Street London, SE1 9NH United Kingdom Threadneedle Street London, EC2R 8AH United Kingdom National Bureau of Economic Research (NBER) Series Subscribe to this free journal for more curated articles on this topic

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