Companies see cost as key to raising prices

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Companies are more likely to increase the prices they charge when their costs go up than when demand rises, according to a Bank of England survey to be released tomorrow.

The survey of 654 companies, published in the Bank's quarterly bulletin, shows that setting prices in response to changes in costs rather than market conditions is widespread.

The results of the survey, the first of its kind in the country, confirm the suspicion that price-setting in the UK is "sticky" compared with the pattern revealed by a similar survey in the US. The most popular way to set price revealed by the Bank's questionnaire was as a mark-up over costs per unit of output.

The Bank notes: "There are many reasons why monetary policy might affect the economy. Economists have long suspected that part of the reason might be that prices are slow to adjust."

More than a fifth of companies said they reviewed their prices as often as daily, and over half did so at least monthly. However, only 5 per cent actually changed prices as often as every month. By far the majority changed their prices only once or twice a year.

Price changes were more frequent in retailing than in manufacturing. Retailers typically reviewed prices every week and changed them three times a year, while manufacturers reviewed quarterly and changed prices twice a year on average.

Companies signing long-term contracts with a high proportion of their customers - in construction, for example - changed prices far less frequently. In fact, the existence of a contract was ranked as the most important determinant of price by the firms surveyed.

However, greater competition increased the number of price changes. The Bank suggests this is because the consequences of charging the wrong price are more serious in an industry where demand is more sensitive to prices.

Firms indicated that market conditions also influenced the pricing decision. Many said they were particularly conscious of what rivals were charging. Almost 40 per cent said they set prices at the highest level the market could bear.

There was also clear evidence of asymmetry. A cost increase was far more likely to lead to a price rise than a cost decrease was to trigger a price fall. But a drop in demand was more likely to be met by a price reduction than higher demand was to lead to a price rise.