Price Dispersion and Inflation: New Cross-sectoral and International Evidence

This paper investigates the relationship between price dispersion and inflation, shedding light on one major source of the cost of high inflation. By analyzing novel product-level web-scraped data from over 60,000 restaurants and supermarkets across 18 countries facing high and low inflation periods, I uncover new evidence of a significant positive correlation between inflation and price dispersion. My findings reveal that the average annualized inflation, ranging between zero and 20 percentage points across countries within a condensed time frame, is significantly associated with higher price dispersion in both the restaurant and supermarket sectors. The estimates indicate that the marginal effect of suboptimal inflation on product-level distortions is positive, economically significant in all inflation environments and heterogeneous across sectors. Cross-sectionally, I find that an increase of annualized inflation from zero to 10 percent increases inefficient price dispersion for supermarkets by 46% and for restaurants by 73%. Finally, the relationship between inflation and price dispersion does not flatten much at higher inflation, so that the marginal cost of additional inflation does not vanish as inflation rises -- a pattern standard menu-cost models do not generate. This indicates a sustained impact of inflation on price dispersion, implying that accommodating higher inflation levels incurs substantial welfare costs.