Box 1: Firms’ price-setting behaviour returns to pre-pandemic approaches

During the recovery from the pandemic, many businesses changed their price-setting behaviour in response to an environment with:

• elevated cost growth
• strong demand
• widespread supply constraints

Because businesses and their competitors faced similar supply chain difficulties, the lack of choice made customers more willing to accept higher prices. Firms’ ability to pass on higher costs to their customers increased. Under these conditions, firms made price changes that were larger and more frequent than usual. As in pre-pandemic periods, businesses set prices based mainly on their own costs and competitive conditions—not on past or expected inflation. In other words, during the recovery, firms’ inflation expectations—even when elevated—did not play a major role in their pricing decisions.

In the third quarter, most businesses that adjusted their price-setting practices have already returned to or will soon return to their pre-pandemic behaviour, including:

• changing prices infrequently
• waiting for signs of concrete cost increases
• paying close attention to competitors’ prices

Still, some firms anticipate that unusual price setting will continue until supply chain and inventory issues are resolved.