Macroeconomic and microeconomic data paint conflicting pictures of price behavior.
Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate
that firms change prices frequently. We formulate and estimate a model which resolves
this apparent micro - macro conflict. Our model is consistent with post-war U.S.
evidence on inflation inertia even though firms re-optimize prices on average once every
1.5 quarters. The key feature of our model is that capital is firm-specific and predetermined
within a period.