The pass—through of cost shocks to firms' prices and profits

The post-pandemic surge in the prices of intermediate goods and energy has intensified scrutiny of firms' pricing policies and their role in fuelling inflation by passing cost shocks through to consumer prices. This paper combines firm-level balance sheet and price data to decompose the nominal growth rate of value added and operating profits into price and quantity effects. Between 2016 and 2023 the pass-through of intermediate input price changes to firms' output prices was less than one-to-one, with pricing policies contributing negatively to value added dynamics. Instead, quantity effects emerged as the main driver of growth in value added, particularly during the post-pandemic recovery. Econometric analysis indicates that, in response to intermediate input price shocks, very large firms exhibit strong pass-through capacity, which is associated with concurrent economic gains. However, this was not the average case, as firms' price setting behaviour generally offered limited protection against unexpected input costs.