Effects of the weakened exchange rate on consumer prices (input-output analysis)
This box quantifies the cost impacts of the weakened exchange rate of the koruna on prices following the CNB’s decision to use the exchange rate as a monetary policy instrument. The CZSO’s symmetric input-output tables were used to this end. These tables enable us to analyse nominal flows among economic sectors, the structure of value added and the components of final use during a single year.1 Among other things, they can be used to quantify the import intensity of individual GDP expenditure components and of each sector or product considered, broken down by CZ-CPA2 categories.
For example, according to these data, a quarter of all foods (see Table 1) are imported directly. However, imported inputs are further used in domestic food production. The overall import intensity of food is thus higher than one-third (35%). The most import-intensive items are computers, metals, machinery and equipment, and medicines, but their aggregate weight in the consumer basket is small. By contrast, services have a very low import intensity, but have the greatest weight in the consumer basket. Overall, the direct import intensity of household consumption is around one-quarter and its total import intensity is around one-third.
Table 1 (Box) Import intensity of product groups and household consumption
The most import-intensive items are computers and basic metals, but their weight in the consumer basket is negligible; the opposite is true for services
|Product class||Weight in the CPI||Import intensity|
|Raw materials excluding oil||1.6||43||36|
|Medicines and health care||2.3||50||44|
|Machinery and equipment||0.3||58||50|
|Other products and semi-finished products||16.5||56||47|
The cost effect of the weakened exchange rate on prices of individual product classes can be assessed using the estimated import intensities. The impact of a permanent 5% weakening of the koruna assuming 100% pass-through to product prices is quantified in Table 2. For example, food prices should rise by 1.2% directly and by 1.8% in the longer term as a result of such an exchange rate weakening. Both the direct and long-term effects for services amount to less than 1%. The total long-term effect of the weakened exchange rate on the consumer price index is estimated at 1.6%. 3
Table 2 (Box) Effect of a permanent 5% weakening of the exchange rate on product prices and the CPI
The weaker exchange rate has a larger effect on products with low weights in the consumer basket
|Product class||Weight in the CPI||Long-term effect||Direct effect|
|Raw materials excluding oil||1.6||2.1||1.8|
|Medicines and health care||2.3||2.5||2.2|
|Machinery and equipment||0.3||2.9||2.5|
|Other products and semi-finished products||16.5||2.8||2.3|
These results only partially estimate the pass-through of the exchange rate to prices. On the one hand, retailers may in practice slow the rise in prices over a one-year period by compressing their mark-ups, so the pass-through of higher import prices into consumer prices may not be complete. On the other hand, the estimate does not take into account the impacts of the weakened exchange rate on economic activity, wages and so on, which also affect prices in the longer term. These effects on mark-ups and macroeconomic growth are identified comprehensively in CNB forecasts. The November and December 2013 inflation figures suggest that the effect of the weakened exchange rate on most price categories is broadly in line with the assumptions.
1The CZSO usually publishes symmetric input-output tables at a five-year frequency. The currently available data are for 2010.
2Statistical classification of products by activity.
3The import intensity of household consumption (Table 1) and the pass-through to the consumer price index (Table 2) are computed using recalculated CPI weights corresponding to the CZ-CPA product breakdown. For this reason, the weights considered are different from official weights of the consumer basket.