An I(2) Analysis of Inflation and the Markup.

An I(2) analysis of Australian inflation and the markup is undertaken within an imperfect competition model. It is found that the levels of prices and costs are best characterised as integrated of order 2 and that the levels cointegrate to the markup which is integrated of order 1. A further cointegrating relationship is found to exist where higher price inflation results in a lower markup in the steady state. The negative correlation between inflation and the markup is interpreted as the cost to firms of overcoming missing information when adjusting prices in an inflationary environment.