Cost Pass-Through and the Rise of Inflation

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%.