Last updated: June 2021
We propose a simple, model-free way to measure selection in price setting and its contribution to inflation dynamics. The proposed measure of price selection is based on the observed comovement between inflation and the average level from which adjusting prices departed in the previous period. When adjusting prices depart from lower-than-usual levels, the associated price increases are larger, pushing inflation above average. Using detailed micro-level consumer price data for the United Kingdom, the United States, and Canada, we find robust evidence of strong price selection across goods and services. At a disaggregate level, price selection accounts for 37% of inflation variance in the United Kingdom, 36% in the United States, and 28% in Canada. Price selection is stronger for goods with less frequent price changes or with larger average price changes. Aggregate price selection is considerably weaker. This evidence can be accounted for by a relatively standard multisector sticky-price model. The model demonstrates a monotone relationship between price selection and the extent of monetary non-neutrality.