How Rigid are Producer Prices?

How rigid are producer prices? A longstanding conventional wisdom among economists holds that producer prices are more rigid than, and so play less of an allocative role than do, consumer prices. In the 1987-2008 microdata collected by the U.S. Bureau of Labor Statistics for the producer price index (PPI), we find that producer prices for finished goods and services in fact exhibit roughly the same degree of flexibility as consumer prices, with a median frequency of price change that falls between that of consumer prices including, and excluding, sales. This pattern becomes clear once one weights large firms by their revenue in aggregating the data, as large firms change prices two to three times more frequently than do small firms, and by smaller amounts. We also find that longer price durations are associated with larger price changes for goods firms, but not for services firms, and that while long-term contracts are associated with somewhat greater price rigidity for both goods and services firms, the differences are not dramatic. Finally, the size of price decreases plays a key role in PPI inflation dynamics, a fact that is not accounted for by standard workhorse macroeconomic pricing models