Relative cost to price passthrough with firm level data

Fecha: junio 2024 (versión revisada)

Vicente Salas-Fumás and Pilar Rivera Torres

Relative cost to price passthrough with firm level data*

This paper presents estimates of the average elasticity of price increases to cost increases (relative passthrough) with survey-collected data from a sample of Spanish firms during the inflationary episode of 2022-2023. The descriptive information confirms that costs increases were generalized in the sample of firms (cost driven inflation), but not all firms that experience cost increases also increase prices or do so immediately. The two steps estimation (decision to increase price or not, and magnitude of the price increase) gives an estimate relative passthrough of 0.5 that rises to 0.6 when the passthrough is competed (cost absorbing passthrough). We find supportive evidence that firms that perceive a more competitive market environment have a higher relative passthrough and transmit faster the cost increase into price increase than firms otherwise. The results of the study reject the hypothesis of profit margin driven inflation and that firms in the sample pre-empted expected future cost increases by rising current prices beyond what could be expected from current cost increases.

* Update version of Rivera-Torres, P. and Salas-Fumás, V. (2023). Cost and price inflation with firm level data: An empirical analysis. Nota Técnica, julio 2023.

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