Aggregate price pressures along the supply chain: a euro area perspective

In this article, we take a closer look at how price pressures affect sectoral and aggregate price indices. From a central bank perspective, especially, it is important to know how price changes on a more granular level affect the aggregate price index, which is often used as a benchmark to assess price stability. We employ a vector autoregression with a set of price and macro variables and perform an impulse response analysis. A simulation of a specific price shock enables us to trace its dynamic impact on a variety of price variables over time. Our main findings indicate that (1) sectoral price pressures impact both sectoral and headline inflation, and (2) the price pass-through increases at later stages of the production process, being nearly one-to-one for changes in producer prices. Moreover, (3) upstream and intermediate energy prices have the most sizable direct effect on sectoral variables by far, while food prices appear to be stronger determinants of headline inflation. In general, our results suggest that sectoral price developments can be indeed informative for headline inflation, confirming results of more complex network models.