As we want to concentrate on the pass-through to consumer prices, we do not analyse PPI
capital goods. Moreover, as the above structure already implies a significant amount of cross-
component relationships, we decided not to include sectoral import prices in the model. We
include commodity prices separately by splitting them into energy, food and industrial raw
material prices as we expect energy prices to have a different impact than non-energy
commodity prices. In addition, energy prices might have more importance for particular
components of the PPI or the HICPX, while food and industrial raw material prices might be
more relevant for other components. This differentiation between energy and non-energy
commodity prices is also rather new in the literature.4
2. Data and estimation technique
The main variables under consideration are producer prices and consumer prices of the euro
area. Chart 1 and Chart 2 show the development in the main components of the PPI (energy,
intermediate goods and consumer goods) and the HICPX (HICP excluding unprocessed food
and energy and its components).
Chart 1 Producer prices
(Quarterly rates of change)
Chart 2 Consumer prices
(Quarterly rates of change)
Source: Eurostat.
PPENE: PPI energy; PPINT: PPI intermediate goods;
PPCONS: PPI consumer goods.
Source: Eurostat.
CPFDPR: HICP processed food; CPNEIG: HICP non-
energy industrial goods; CPSERV: HICP services,
CPEX: HICP excluding unprocessed food and energy,
i.e. the weighted average of the three components
above using HICP weights.
It is clearly visible from these charts that inflation, particularly at the consumer level,
decreased significantly in the run-up to EMU but that inflation has since then been affected by
4 In the Area Wide Model of the ECB, overall commodity prices are used to determine developments in
import prices by using a weighted average of oil and non-energy commodity prices. See Fagan et al.
(2005).
ECB ■
Working Paper Series No 1104
November 2009∣ 9