The impact of import prices on inflation in the euro area

We study low consumer price inflation in the euro area between 2013 and the third quarter of 2016, before its recent increase due to higher energy prices. Two main factors identified in Rue de la Banque No. 6 have continued to contribute roughly equally to low headline inflation up to 2015: imported inflation and domestic slack (output gap). Since 2015, the downward pressure from lower import prices has increased while that from domestic slack has eased noticeably. Focusing on consumer prices of manufactured goods, we find that the pass-through of import prices of manufactured goods is almost complete after a period of six quarters. Import prices of manufactured goods explain a significant
part of the 2013-2015 weakness and the subsequent recovery of manufactured goods consumer price inflation.