Consumer Price Dynamics in response to International Shocks
After the Brexit-announcement, the Economist headlined “How will the pound’s depreciation affect inflation in Britain?”. The article states that economists still rely on rules of thumb to predict the impact of currency fluctuations on consumer price inflation. The presence of complex supply chains and limited data on how these products flow through these complicated structures restrict the inference economists can make on how exchange rate fluctuations affect final consumer prices. Even though the project focuses on a currency shock in Kazakhstan, the results will allow economists and policymakers to better predict how large international shocks, such as Brexit and the subsequently announced increase in customs duties, affect prices faced by final consumers. By employing a novel, unique and highly detailed dataset on grocery products at different stages of the supply chain, this project aims to push this research agenda by focusing on the role of the distribution sector in two ways. First, it introduces the role of inventories at the distribution sector as a mediator in the transmission of changes in the wholesale cost into consumer prices. Second, it studies how differences in bargaining power between retailers and manufacturers across product categories explain differences in the pass-through of wholesale costs into consumer prices. This is in sharp contrast with the literature which generally assumes that all the bargaining power is at the level of manufacturers.