Cost Pass-Through and the Rise of Inflation

Transmission des coûts et hausse de l’inflation

Raphaël Lafrogne Joussier, Julien Martin and Isabelle Mejean ()
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Raphaël Lafrogne Joussier: CREST-INSEE - Centre de Recherche en Economie et en Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - GENES - Groupe des Écoles Nationales d'Économie et Statistique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - GENES - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - INSEE - Institut national de la statistique et des études économiques (INSEE), INSEE - Institut national de la statistique et des études économiques (INSEE)
Julien Martin: UQAM - Université du Québec à Montréal = University of Québec in Montréal, CEPR - Center for Economic Policy Research
Isabelle Mejean: Sciences Po - Sciences Po, CEPR - Center for Economic Policy Research

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Abstract: We use micro-level price data underlying the French producer price index from January 2018 to July 2022, along with external measures of firms' exposure to imported inputs and energy cost shocks, to study the role of external shocks in the recent inflation surge. Within our sample, firms pass through 30% of changes in the price of imported inputs and 100% of changes in energy costs when resetting their prices, conditional on their exposure to these shocks. For the average firm in our data, this implies that a 10% increase in foreign costs leads to a 0.74% rise in output prices, while a 10% energy cost shock induces prices to increase by 0.73%. We examine how pass-through rates vary across firms within and across industries, depending on their size and exposure to shocks. We find that pass-through rates are asymmetric, with positive cost shocks inducing significantly more pass-through than negative shocks. The heterogeneity in exposure to external shocks across firms and sectors drives important differences in inflation dynamics along firms' distribution. To illustrate this, we predict price changes from cumulative imported inputs and energy price changes between January 2021 and July 2022, and find that between 70% and 75% of the variance in predicted price changes happens within 2-digit industries, across firms. The chemical and metal industries are the most impacted by both imported and energy cost shocks, which contribute to an increase in producer prices in those sectors of at least 9% to 14%.

Keywords: Inflation; Cost Pass-Through; Imported Inflation; Energy prices; Transmission des coûts; Inflation importée; Prix de l'énergie (search for similar items in EconPapers)
Date: 2023-05
Note: View the original document on HAL open archive server: https://insee.hal.science/hal-05354314v1
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