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Consumers need to allocate time, effort and funds to planning, budgeting and shopping
High inflation is imposing additional costs on businesses and households, which must allocate more time and energy to navigate changing prices, the deputy governor of the Bank of Canada told a central banking conference in Europe this week.
Discussing a recent study on inflation and the misallocation of resources, Bank deputy governor Sharon Kozicki said these additional costs show how price stability is important and “a key ingredient to a prosperous economy.”
“Inflation is costly, but not just because price dispersion may increase,” Kozicki said during a presentation at the European Central Bank forum in Portugal on June 27.
For companies, Kozicki said price management always incurs costs, but those costs are higher when inflation is higher.
Referring to a 2004 study, Kozicki said businesses face a variety of costs when they set prices: their physical or menu costs, managerial costs and customer costs.
She said that while menu costs are most directly tied to price adjustment, these are not the most significant costs. Managerial costs, such as information gathering, decision making and communication, are more than six times as much as menu costs, and customer costs, such as communicating and negotiating prices, are more than 20 times.
The main study’s analysis shows price-setting decisions depend considerably on the state of the economy, with higher inflation accompanied by higher costs, she said. These higher costs can be thought of as employing lower productivity, which means they will weigh on consumer welfare, Kozicki added.
“Large shocks are passed through the prices more quickly than smaller ones and this result is clearly important for monetary policy,” she said.
Kozicki noted that there are more costs to inflation besides those related to price management. She said when examining the welfare costs of inflation, what happens to wages and leisure matters as well.
“Consumers need to allocate time, effort and funds to planning, budgeting and shopping,” Kozicki said, adding that across income levels and household sizes, consumers reported they were changing their purchasing behaviour due to higher inflation.
These include actions such as buying cheaper products, which are often lower quality or embed fewer services, she said. Consumers are also using vouchers or coupons which require time to research and organize, and they’re cutting spending on some services such as subscriptions, she added.
She said consumers might not like having to deal with volatile price movements, especially prices of fresh food and gasoline, but they do adjust to them by allocating time to budgeting, planning and shopping. Consumers look for good deals and change their consumption patterns depending on how the prices of various goods are shifting relative to each other.
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“Consumers need to spend more time to do this and this comes at the expense of their leisure,” she said.
Ultimately, it seems that it doesn’t matter to consumers so much whether the prices are high or low relative to the efficient price — it matters whether they can afford what they’re used to buying, Kozicki said.
“Low and stable inflation strengthens competitive forces in an economy, and allows households and businesses to plan and invest with confidence that their money will hold its value,” she said.
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