How Do Mark-Ups Vary with Demand?

7 Pages Posted: 18 Jun 2008

See all articles by Clare Macallan

Clare Macallan

Bank of England - Monetary Assessment and Strategy Division

Miles Parker

Reserve Bank of New Zealand

Date Written: 2008

Abstract

The Monetary Policy Committee's (MPC's) objective is to deliver price stability. In order to achieve that goal, it is necessary to understand how inflation reacts to economic events. In the long run, inflation is determined by monetary policy. But over a shorter time horizon, one important determinant of changes in inflation is the gap between the prices charged by businesses and the costs that they face: that 'mark-up' will influence how changes in demand relative to supply feed through into consumer price inflation. The evidence presented in this article suggests that mark-ups vary positively with excess demand. That will increase the sensitivity of inflation to changes in excess demand. But it could also increase the efficacy of monetary policy, since the level of excess demand is in part determined by the level of Bank Rate set by the MPC.

Suggested Citation

Macallan, Clare and Parker, Miles Ian, How Do Mark-Ups Vary with Demand? (2008). Bank of England Quarterly Bulletin 2008 Q2, Available at SSRN: https://ssrn.com/abstract=1147038

Clare Macallan (Contact Author)

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Miles Ian Parker

Reserve Bank of New Zealand ( email )

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

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