Relative price variability and inflation: New evidence

•The paper investigates the relationship between relative price variability and inflation.•Micro-price data for 128 goods in 13 Turkish regions for the period 1994–2010 is used.•Semi-parametric estimations show that there is a hump-shaped relationship.•A region- or city-level homogenous menu cost model is provided.•The model is shown to be consistent with the empirical evidence. This paper investigates the relationship between relative price variability (RPV) and inflation using monthly micro-price data for 128 goods in 13 Turkish regions/cities for the period 1994–2010. The unique feature of this data set is the inclusion of annual inflation rates ranging between 0% and 90%. Semi-parametric estimations show that there is a hump-shaped relationship between RPV and inflation, where the maximum RPV is achieved when annual inflation is approximately 20%. It is shown that this result is consistent with a region- or city-level homogenous menu cost model that features Calvo pricing with an endogenous contract structure and non-zero steady-state inflation.