Pass-Through in Levels and the Unequal Incidence of Commodity Shocks

110 Pages Posted: 11 Oct 2023

Date Written: September 17, 2023

Abstract

Empirical studies of commodity cost pass-through typically find that pass-through is incomplete: even at long horizons, a 10 percent increase in costs causes retail prices to rise less than 10 percent. Using microdata from gasoline and food products, I find that incomplete pass-through in percentages often disguises complete pass-through in levels: a $1/unit increase in commodity costs leads to $1/unit higher retail prices. Pass-through appears incomplete in percentages due to an additive margin between marginal costs and prices. A model in which firms seek to bound the risk of variable profits falling short of overhead costs can account for this pricing behavior. In contrast to the workhorse model, this model also predicts dynamics of industry gross margins and entry consistent with the data. An implication of complete pass-through in levels is that rising commodity costs lead to higher inflation rates for low-margin products in a category, though absolute price changes are similar across products. This generates cyclical inflation inequality. I find that food-at-home inflation for the lowest income quintile is 10 percent more sensitive to upstream commodity costs. From 2020–2023, unequal commodity cost pass-through is responsible for two-thirds of the gap in food-at-home inflation rates experienced by low- and high-income households.

Keywords: pass-through, commodity shocks, inflation

JEL Classification: E31, D22, D40

Suggested Citation

Sangani, Kunal, Pass-Through in Levels and the Unequal Incidence of Commodity Shocks (September 17, 2023). Available at SSRN: https://ssrn.com/abstract=4574233 or http://dx.doi.org/10.2139/ssrn.4574233

Kunal Sangani (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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