A new research paper from the Reserve Bank of New Zealand (RBNZ) explores how businesses set prices and how this behaviour affects inflation—both now and in the future.Key Findings:Price-setting is a major driver of inflation: The way firms adjust prices for goods and services plays a critical role in determining the pace and persistence of inflation.Recent inflation matters more than expectations or old data: Firms tend to adjust their prices based on the inflation they have experienced recently, rather than what they expect in the future or what occurred years ago.Model-based insights are more useful than surveys: When it comes to forecasting domestic or non-tradables inflation (inflation in sectors less exposed to international prices, like housing, education, or healthcare), models that incorporate recent data outperform business surveys.Still value in using multiple tools: While model-based measures may be more accurate, there isn’t a huge gap between different methods. The authors recommend considering all available measures, since price-setting behaviour can shift over time.Why this matters for monetary policy: Understanding how and when businesses change their prices helps the Monetary Policy Committee decide how persistent inflation will be, and how quickly it will return to the RBNZ’s 2% target. This, in turn, influences decisions on where to set the Official Cash Rate (OCR).Bottom Line:The RBNZ’s research suggests that inflation forecasts should focus more on how firms are reacting to recent inflation trends. This approach can help better guide interest rate decisions, especially during periods following unusually high or low inflation. This article was written by Eamonn Sheridan at investinglive.com.