The Impact of the 2008 Crisis on UK Prices: What We Can Learn from the CPI Microdata1
| Published date | 01 December 2021 |
| Author | Kun Tian,Huw Dixon,Kul Luintel |
| DOI | http://doi.org/10.1111/obes.12373 |
| Date | 01 December 2021 |
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©2020 TheAuthors. OxfordBulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
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OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 82, 6 (2020) 0305–9049
doi: 10.1111/obes.12373
The Impact of the 2008 Crisis on UK Prices: WhatWe
Can Learn from the CPI Microdata*
Huw Dixon†Kul Luintel† and Kun Tian‡,§
†Cardiff Business School, Cardiff, CF103EU, UK. (e-mail: dixonh@cardiff.ac.uk;
LuintelK@cardiff.ac.uk)
‡University of East Anglia, Norwich, NR47TJ, UK (e-mail: kun.tian@uea.ac.uk)
§Hunan University of Technology and Business, Changsha, 41100, China.
Abstract
This paper takes the locally collected price quotes used to construct the CPI index in the
UK for the period 1996–2013 and explores the impact of the Great Recession (2008-9) on
the pricing behaviour of firms. We develop a time series framework which captures the link
between macroeconomic variables and the behaviour of prices in terms of the frequency of
price change, the dispersion of price levels and the size, dispersion and kurtosis of price-
growth. We find strong evidence for inflation having an effect, but not output. The change
in the behaviour of prices during the Great Recession is largelyexplained by the changes in
inflation and VAT. Nevertheless, the magnitude of the inflation effect is sufficiently small
that it need not influence monetary policy.
I. Introduction
The period 2008-2010 saw the biggest recession in terms of output loss in British postwar
economic history:1it also witnessed 20% depreciations of sterling against both the Dollar
and Euro along with inflation well above the levels seen in the preceding decade. There
was also a temporary reduction in VAT (from December 2008, reversed in January 2010),
plus a permanent increase (introduced in January 2011). We aim to assess how f ar these
big macroeconomic events were reflected by changes in the behaviour of price setters.
Specifically, we seek to document the impact of these events on the behaviour of prices as
captured by the microdata on price quotes used to construct the UK Consumer Price Index
(CPI). While the main determinants of individual prices are likely to be microeconomic
JEL Classification numbers: E30, E50, E61.
*We would like to thank Jeff Ralph and Ainslie Woods at the ONS for their help. This paper was presented at
the EMF meeting March 2014 and the Bank of England May 2014,Anglo-French Workshop (Marseilles) December
2014, 19th Conference on Macroeconomics and International Finance, Crete May 2015, Microdata workshop ONS
2016. Wewould like to thank Matt Canzoneri, Dale Henderson, Herve Le Bihan, Patrick Minford, Greg Thwaites, Jo
Vavra,Rupert de Vincent-Humphries and Steve Millard for their comments. Kun Tianthanks financial support from
Humanity and Social Science Fund of Ministry of Education China (No.18YJC790149). The editor Jon Temple and
the referees were most helpful. Faults remain our own.
1However,note that the unemployment rate was higher in the 1980-1 recession despite a lowerlevel of output loss.
Impact of 2008 crisis on UK prices 1323
shocks in the firm’s immediate environment, nonetheless, macroeconomic factors affect
all prices and can therefore have a significant impact on aggregate pricing behaviour which
may be important for monetary policy design. We seek to analyse this using data that extend
from the Great Moderation period until the postcrisis recovery period, spanning 1996–2013
with over 20 million price quotes covering a wide range of items across the CPI.
Our analytical approach proceeds in two stages. First, we describe the behaviour of
aggregate prices using statistics built up from the price quote data used to construct the
CPI index. The ‘frequency’ or proportion of prices which change in a given month (sub-
divided into changes up and down); measures of the dispersion of price levels for the
same product; three dimensions of the distribution of the growth of prices (absolute size,
dispersion and kurtosis). They are the main statistics about pricing behaviour that have
been of interest in the recent literature.2This helps shed light on what happened to pricing
during the Great Recession (GR) period. Second, we adopt a time series approach and
scrutinize the relationship between these price statistics and the macroeconomic variables
of output and inflation. We also examine the effects of the three VAT changes over the
period 2008–11 and the GR. The VAT changes were common shocks across the range of
items subject to VAT, while the crisis dummy captures the extent behaviour changed as a
result the GR. Our study on UK data complements studies by Vavra (2014) and Nakamura
et al. (2018) for the US and Berardi et al. (2015) for France. This also extends the many
studies on precrisis pricing behaviour such as Dhyne et al. (2006), Baudry et al. (2007),
Klenow and Kryvtsov (2008), Nakamura and Steinsson (2008), as surveyedin Klenow and
Malin (2011).
Our main findings are clear. For all our statistics, inflation matters but output does not.
The effect of output on pricing in theory is captured mainly via the link between output and
marginal cost. While in some calibrations with a very low labour supply elasticity pricing
can be highly responsive to output, in manycalibrations output has little effect on marginal
cost and pricing.3Our results support the calibrations where marginal cost responds little
to output.
We find that inflation tends to increase the frequency of price changes, mainly by
raising the frequency of price increases. Our estimates are that a 1% point increase in
annual inflation causes an increase in the monthly frequency of about 0.5% points: thus
for example an increase in inflation from 2% per annum to 5% might cause the monthly
frequency to increase from 15% to 16.5%. Inflation reduces the dispersion of price levels,4
and reduces the dispersion of price growth and increases its kurtosis. Changes in VAT have
an important effect, as does seasonality.
2For example, seeAlvarez et al. (2016), Midrigan (2011), Klenow and Kryvtsov (2008), Nakamura and Steinsson
(2008), Nakamura et al. (2018). Frequency is probably the most important statistic, as it reflects the flexibility of
prices: a higher frequency is often interpreted as meaning prices are more flexible and hence monetary policy less
effective. However, the other statistics have also been seen as important as shedding light on firm behaviour and
consumer welfare.
3For a calibration wheremarginal cost is highly responsive to output, see Chari, Kehoe and McGrattan (2000). For
one with low responsiveness see Coenen, Christofel and Levin (2007). Dixon and Kara (2011) discuss the various
calibrations and the evidence for them. The unresponsivenessof marginal cost to output was called ‘real rigidity’ by
Ball and Romer (1990).
4At least for our preferred measures of price dispersion.
©2020 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and JohnWiley & Sons Ltd.
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