Micro-prices and aggregate stickiness: evidence for Chile

Abstract

This research describes price-setting over time and across items in Chile, an emerging market economy. The microeconomic database underlying the consumer price index (CPI) is used to characterize microeconomic pricing behavior, and to study its implications for the transmission of monetary policy to the real economy. Prices are found to be relatively flexible at a microeconomic level, in contrast to macroeconomic findings. Price changes are also mainly small and quite synchronized, and display a decreasing hazard rate. An evaluation of the relevance of microeconomic price data moments for forecasting aggregate inflation finds that the frequency of price increases and decreases, and their respective absolute magnitudes-which can only be computed from disaggregated data-can significantly improve on inflation forecasting based solely on aggregate variables.