Why is higher inflation worse than lower inflation?

Fredrik Wulfsberg’s analysis of Norwegian data suggests it is because when inflation gets higher (i.e. 10-15% range) firms change prices much more frequently, and so presumably this is more confusing for consumers.

The main result in this paper is that the variation in the frequency of price changes is more important than the size of price changes when inflation is high and vola-tile, and for the transition from the high-inflation to the low-inflation regime. When inflation is low and stable, both the frequency and the size of price adjustments are important, but the size is more important than the frequency. Prices thus changed more often and in smaller steps when inflation was high and volatile, and less often but by larger steps when inflation was low

Source: Inflation and Price Adjustments: Micro Evidence from Norwegian Consumer Prices 1975–2004 – mac.20140095

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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