The paper by John B. Taylor examines the decline in firms' "pass-through" of cost changes to prices, often referred to as a reduction in firms' "pricing power." This decline is associated with the decline in inflation in many countries. Taylor argues that the low inflation environment itself is the primary cause of the reduced pass-through. He presents a microeconomic model of price setting to show that lower pass-through is due to lower perceived persistence of cost changes. Evidence suggests that inflation is positively correlated with the persistence of inflation, indicating that low inflation has led to lower pass-through. Taylor also presents an economy-wide model to illustrate how changes in pricing power affect output and inflation dynamics. The model shows that the reduction in pricing power can have favorable effects on output and inflation but can disappear quickly if monetary policy and expectations change. The paper concludes that the observed decline in pricing power should not be taken as exogenous to the inflationary environment and that a return to higher inflation expectations could lead to increased pass-through and inflation.The paper by John B. Taylor examines the decline in firms' "pass-through" of cost changes to prices, often referred to as a reduction in firms' "pricing power." This decline is associated with the decline in inflation in many countries. Taylor argues that the low inflation environment itself is the primary cause of the reduced pass-through. He presents a microeconomic model of price setting to show that lower pass-through is due to lower perceived persistence of cost changes. Evidence suggests that inflation is positively correlated with the persistence of inflation, indicating that low inflation has led to lower pass-through. Taylor also presents an economy-wide model to illustrate how changes in pricing power affect output and inflation dynamics. The model shows that the reduction in pricing power can have favorable effects on output and inflation but can disappear quickly if monetary policy and expectations change. The paper concludes that the observed decline in pricing power should not be taken as exogenous to the inflationary environment and that a return to higher inflation expectations could lead to increased pass-through and inflation.