This paper investigates the predictions of a simple optimizing model of nominal price rigidity for the aggregate price level and the dynamics of inflation. It compares the model's predictions with those of a perfectly competitive, flexible price 'benchmark' model and evaluates how much the introduction of nominal rigidities improves the model's fit with the data. The model's predictions are derived using only the firms' optimal pricing problem, taking as given the paths of nominal labor compensation, labor productivity, and output. The results are presented in terms of the predicted path of the price/unit labor cost ratio, where parameters are chosen to maximize the fit with the data. The paper finds that a simple model of nominal price rigidity delivers an extremely close approximation of the price/unit labor cost ratio and the inflation series, even under a very simple approach to the measurement of marginal costs. The model shows that prices are driven by the anticipated behavior of unit labor costs, which closely matches the actual behavior of prices. The results suggest that nominal rigidities are a reasonable component of general equilibrium models and that the failure of existing models to reproduce empirical facts may be due to other features of these models rather than a misspecified pricing equation. The paper also highlights the importance of forward-looking behavior in price setting and the role of marginal costs in determining inflation dynamics. The findings support a forward-looking model of price setting and indicate that neither variations in marginal costs unrelated to changes in unit labor costs nor fluctuations in markups for reasons unrelated to price stickiness are needed to explain the greater part of U.S. fluctuations in the aggregate price level. The results are robust to different specifications of the forecasting system and show that the model provides a good fit to the data, with the price/unit labor cost ratio and inflation process closely matching the actual data. The paper concludes that the model's predictions are consistent with the empirical data and that the introduction of nominal price rigidity significantly improves the model's fit to the data.This paper investigates the predictions of a simple optimizing model of nominal price rigidity for the aggregate price level and the dynamics of inflation. It compares the model's predictions with those of a perfectly competitive, flexible price 'benchmark' model and evaluates how much the introduction of nominal rigidities improves the model's fit with the data. The model's predictions are derived using only the firms' optimal pricing problem, taking as given the paths of nominal labor compensation, labor productivity, and output. The results are presented in terms of the predicted path of the price/unit labor cost ratio, where parameters are chosen to maximize the fit with the data. The paper finds that a simple model of nominal price rigidity delivers an extremely close approximation of the price/unit labor cost ratio and the inflation series, even under a very simple approach to the measurement of marginal costs. The model shows that prices are driven by the anticipated behavior of unit labor costs, which closely matches the actual behavior of prices. The results suggest that nominal rigidities are a reasonable component of general equilibrium models and that the failure of existing models to reproduce empirical facts may be due to other features of these models rather than a misspecified pricing equation. The paper also highlights the importance of forward-looking behavior in price setting and the role of marginal costs in determining inflation dynamics. The findings support a forward-looking model of price setting and indicate that neither variations in marginal costs unrelated to changes in unit labor costs nor fluctuations in markups for reasons unrelated to price stickiness are needed to explain the greater part of U.S. fluctuations in the aggregate price level. The results are robust to different specifications of the forecasting system and show that the model provides a good fit to the data, with the price/unit labor cost ratio and inflation process closely matching the actual data. The paper concludes that the model's predictions are consistent with the empirical data and that the introduction of nominal price rigidity significantly improves the model's fit to the data.