Inflation, relative prices and their skewness

Abstract

The results are presented of an empirical study on the extent of the skewness of price changes across products for nine European countries. Skewness may arise from product-specific shocks or high costs in undertaking price changes leading to irregular, though unusually large, price changes. Hypotheses are established as to the nature of such skewness and results provided. It is argued that our concern might also be with how skewness changes in response to inflation. This is modelled and results are provided which incorporate tests as to the response when inflation is increasing and falling. The empirical results are of interest not only in highlighting features of inflation, but also for their implications for Consumer Price Indices.