Newly published research from the Reserve Bank of New Zealand (RBNZ) shows that businesses are more likely to adjust their prices based on recent inflation trends than future expectations.
The study, authored by RBNZ researchers Ross Kendall and Marea Sing, compared modelled data with survey responses to analyse how firms set prices and how those behaviours influence domestic inflation.
Modelled Pricing Measures has Stronger Predictive Insights
The RBNZ study focused on inflation related to locally consumed goods and services, comparing various indicators of pricing activity. Modelled data consistently outperformed survey responses.
“When explaining and forecasting domestic or non-tradables inflation, modelled measures of price-setting behaviour perform better than survey-based measures,” the authors said.
Real-Time Cost Pressures Drive Firm-Level Pricing Decisions
One of the report’s clearest findings is that businesses are heavily influenced by recent cost conditions, not long-term forecasts or historical patterns. This short feedback loop in decision-making has implications for how inflation behaves in real time and how central banks should interpret business responses to price changes.
“Recent inflation also has more influence on price setting behaviour than expectations of future inflation,” the researchers noted.
The study suggests firms react more like real-time economic actors, responding to what’s happening in the current market environment rather than basing pricing decisions on predictions or outdated experiences. It reinforces a view of business behaviour as rational and reactive, favouring recent, tangible signals over speculative forecasts in practical terms.
No Single Tool Sufficient for Inflation Forecasting Accuracy
While modelled indicators proved more effective in the study, Kendall and Sing caution against relying on any single tool. Businesses with a multi-measure approach remains essential, as pricing behaviours shift over time—particularly during economic shocks or policy changes.
“It is best to consider all measures when explaining and forecasting inflation,” they advised.
Survey-based data, though less predictive in this study, still contributes context, especially when used alongside empirical models. This balanced view supports flexibility in economic modelling, avoiding the pitfalls of over-reliance on one method.
Monetary Policy Applications: Supporting Better OCR Decisions
The study shares practical insights for monetary policy makers. The RBNZ’s Monetary Policy Committee (MPC) relies on a range of data to determine the Official Cash Rate (OCR), which influences borrowing costs and inflation control. Understanding the timing and rationale behind business price adjustments can help fine-tune those decisions.
“This research can help the Monetary Policy Committee make judgements about the inflation outlook and where to set the Official Cash Rate,” Kendall and Sing said.
According to the research, pricing decisions are closely linked to recent inflation, rather than anticipated future changes. The pattern aligns with a flexible, model-based approach to understanding inflation trends.