The pass-through of energy commodity price volatility along the pricing chain in the euro area: A disaggregate approach

This paper extends the existing literature by assessing the pass-through of energy commodity price volatility to producer and consumer price volatility in the euro area at a disaggregated level. To do so, we first construct an appropriate database that matches euro area production sectors to the corresponding consumer goods. We next decompose the international commodity price indices by categories into a common factor and an idiosyncratic factor. We then estimate vector autoregression models for each branch and for each energy commodity category, including the common and idiosyncratic factors. Our results indicate that the volatility of the common factor is the main driver of producer and consumer price volatility, significantly affecting producer prices in more than half of the branches (especially energy-intensive branches such as petroleum , electricity-gas , and chemicals ), while most other branches absorb these shocks and maintain price stability. The volatility in the idiosyncratic components for coal, oil, and gas markets, by contrast, shows only limited pass-through. Overall, euro area producers largely absorb uncertainty, preserving consumer price stability, though some unaffected branches may exploit market volatility for price adjustments.