ifo Institute: Weak Demand during Coronavirus Pandemic Causes Prices to Fall

Many companies are cutting their prices as a result of the coronavirus crisis. This is because reduced demand is taking a greater toll on these companies than supply-related problems. “Our findings suggest that economic policy measures to strengthen demand can significantly help stabilize the economy,” says Sebastian Link, ifo researcher and co-author of a study published in ifo Schnelldienst.

Prices reflect the relative strength of supply and demand effects. Weak demand is taking a greater toll on companies affected by the coronavirus than the pandemic-related shortfall in working hours or disruptions to supply chains. “Our findings show that companies hit hard by the crisis are more likely to cut their prices,” Link explains. By contrast, companies emerging from the crisis as winners are increasing their prices. “This pricing policy cuts across all sectors, but is most pronounced in wholesale and retail,” Link says.

The study is based on microdata from the monthly ifo Business Survey. Such data makes it possible to examine planned price adjustments up to and including August 2020. The ifo Business Survey covers all relevant economic sectors and the data serves as a basis for the ifo Business Climate Index. Expected price reductions due to the temporary lowering of VAT as of July 2020 are not accounted for in the study.