This paper examines the relationship between low inflation, pass-through, and the pricing power of firms. It argues that the decline in pass-through—where firms adjust prices in response to cost changes—is linked to the low inflation environment in many countries. The paper presents a microeconomic model showing that lower pass-through is due to lower perceived persistence of cost changes. Evidence is provided that inflation is positively correlated with the persistence of inflation, suggesting that low inflation itself has caused low pass-through. An economy-wide model is then presented to show how changes in pricing power affect output and inflation dynamics. The paper also discusses the implications of these changes for monetary policy, noting that a return to higher inflation expectations could increase pass-through and speed up inflation. The paper also provides evidence of reduced pass-through in response to exchange rate changes, with studies showing small pass-through effects in the UK, Sweden, and Brazil. McCarthy's time series estimates show a decline in exchange rate pass-through in OECD countries. The paper argues that reduced pricing power may explain the low inflation in the late 1990s despite strong demand pressures. It also discusses the importance of understanding the relationship between inflation and pricing power for monetary policy, noting that changes in pricing power can affect the relationship between output and inflation. The paper presents a simple staggered pricing model with market power, showing that the degree of pass-through depends on the persistence of cost and price changes. It argues that lower inflation is associated with less persistent inflation, leading to lower pass-through. Empirical evidence supports this, showing that the low inflation environment in the US has led to lower pass-through. The paper also discusses the implications of these findings for monetary policy, noting that a return to higher inflation expectations could increase pass-through and speed up inflation. The paper concludes that understanding the relationship between inflation and pricing power is important for monetary policy and economic forecasting.This paper examines the relationship between low inflation, pass-through, and the pricing power of firms. It argues that the decline in pass-through—where firms adjust prices in response to cost changes—is linked to the low inflation environment in many countries. The paper presents a microeconomic model showing that lower pass-through is due to lower perceived persistence of cost changes. Evidence is provided that inflation is positively correlated with the persistence of inflation, suggesting that low inflation itself has caused low pass-through. An economy-wide model is then presented to show how changes in pricing power affect output and inflation dynamics. The paper also discusses the implications of these changes for monetary policy, noting that a return to higher inflation expectations could increase pass-through and speed up inflation. The paper also provides evidence of reduced pass-through in response to exchange rate changes, with studies showing small pass-through effects in the UK, Sweden, and Brazil. McCarthy's time series estimates show a decline in exchange rate pass-through in OECD countries. The paper argues that reduced pricing power may explain the low inflation in the late 1990s despite strong demand pressures. It also discusses the importance of understanding the relationship between inflation and pricing power for monetary policy, noting that changes in pricing power can affect the relationship between output and inflation. The paper presents a simple staggered pricing model with market power, showing that the degree of pass-through depends on the persistence of cost and price changes. It argues that lower inflation is associated with less persistent inflation, leading to lower pass-through. Empirical evidence supports this, showing that the low inflation environment in the US has led to lower pass-through. The paper also discusses the implications of these findings for monetary policy, noting that a return to higher inflation expectations could increase pass-through and speed up inflation. The paper concludes that understanding the relationship between inflation and pricing power is important for monetary policy and economic forecasting.