Inflation and Asymmetric Price Adjustment

Using a unique micro data set, we find pervasive evidence of price asymmetry that is systematically related to inflation. An ordered probit model of pricing by manufacturing, building and merchandising firms shows that inflation: (i) increases the probability of a price increase in response to cost increases and (ii) decreases the probability of a price decrease in response to decreases in demand. Predicted inflation-induced asymmetries also show up for price responses to cost decreases and demand increases but not as overwhelmingly. Similar asymmetries are evident in firm's expectations of price changes, with a slight optimistic bias relative to actual changes.