The asymmetric and heterogeneous pass-through of input prices to firms' expectations and decisions
Summary
Focus
Firms' pricing decisions play a crucial role in shaping inflation, particularly in periods of high inflation and supply chain disruptions. These decisions, in turn, are influenced by how firms respond to fluctuations in input costs. Understanding how firms translate input price changes into their own pricing and broader views on inflation is essential for central banks to manage inflation effectively.
Contribution
Using detailed survey data from the Bank of Italy's Survey on Inflation and Growth Expectations, we examine how firms adjust their own prices and inflation expectations in response to unexpected changes in their input costs, such as prices for raw materials or energy. We identify exogenous shocks through firms' forecast errors, defined as the difference between realised and expected input price growth. We provide evidence on the pass-through of input cost shocks, exploring the different effects of positive and negative shocks, and how these depend on firm characteristics and the state of the economy. In addition, the survey prompts a subset of firms with information about the most recent inflation rate, enabling us to assess the impact of information acquisition on firms' pricing decisions and inflation expectations.
Findings
We find a strong and asymmetric pass-through from input price shocks to firms' own prices and inflation expectations. Firms respond significantly more to cost increases than to cost decreases. The pass-through is stronger in manufacturing and upstream sectors, as well as in firms with higher uncertainty, more frequent price adjustments or lower profit margins. During periods of high inflation, firms rely more on aggregate information than on firm-specific data. Finally, central bank communication about current inflation plays a crucial role in anchoring expectations and reducing firms' sensitivity to cost shocks.
Abstract
This paper studies the pass-through of input price shocks to firms' expectations and pricing decisions using firm-level data from the Bank of Italy's Survey on Inflation and Growth Expectations. We find a strong and asymmetric pass-through: positive input price shocks significantly raise firms' price expectations, realised prices and short-term inflation expectations, while negative shocks have little impact. The pass-through varies systematically with firm characteristics: it is higher for upstream firms and for firms facing greater uncertainty, adjusting prices more frequently, or operating with thinner profit margins. Macroeconomic conditions also matter: firms' expectations respond more strongly to business-specific signals in periods of low inflation and to aggregate signals in periods of high inflation. Finally, we show that providing firms with information about current inflation dampens the pass-through to inflation expectations, underscoring the importance of central bank communication.
JEL classification: D22, D84, E31, E50
Keywords: pass-through, heterogeneous firm expectations, survey data, inflation
