Description:

Kunal Sangani (Princeton University): Pass-Through in Levels and the Unequal Incidence of Commodity Shocks

Abstract: Empirical studies find that the pass-through of commodity price movements to downstream prices is incomplete: a 10 percent increase in upstream costs causes downstream prices to rise less than 10 percent, even at long horizons. Using microdata from gasoline and food products, we find that in complete pass-through in percentages often disguises complete pass-through in levels: a $1/unit increase in commodity costs leads to $1/unit higher downstream prices. Pass-through appears incomplete in percentages due to a gap between prices and costs. This pass-through behavior, as well as other evidence on firm gross margins, operating margins, and entry rates, contrasts with workhorse models that feature fixed, multiplicative markups. 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. From 2020-2023, we estimate that this pass-through behavior is responsible for two-thirds of the gap in food-at-home inflation rates experienced by low-and high-income households.