Explaining Import Price Inflation: A Recent History of Second Stage Pass-through

This paper examines the pass-through of exchange rate changes to the domestic prices of imported consumer goods. Two distinct stages can be identified in the adjustment process. First, changes in the exchange rate are passed on to changes in the prices of imports over the docks. Second, these prices are, in turn, passed on to final retail import prices. It is found that pass-through in the first stage is rapid and complete. In the second stage, pass-through is also complete. It is, however, rather slow as importers appear able to vary their mark-ups substantially and for considerable periods of time. Moreover, the sizeable domestic costs involved in the distribution and sale of imports imply that a proportional change in the price of imports over the docks does not lead to the same proportional change in the retail import price, but rather one that is equal to the share of the imported item in the total bundle of costs faced by importers.