Exchange-rate pass-through
How currency moves translate into domestic prices—and why it’s rarely one-for-one.
TL;DR
Exchange-rate pass-through describes how much a currency move changes domestic prices. It’s usually partial, because firms adjust margins, contracts are sticky, and competition limits price changes.
What it means (plain English)
If your currency weakens, imports become more expensive in local currency. But do prices jump immediately by the full amount? Not always. Reasons pass-through is partial:
- Importers may absorb some costs in margins,
- Exporters may cut their price in foreign currency to keep market share,
- Contracts are fixed for months,
- Retail pricing is “sticky” and delayed.
Pass-through can also be asymmetric: prices rise faster when costs increase than they fall when costs decrease. This price transmission mechanism is especially visible during commodity supercycles, when raw-material swings ripple through import prices.
Common misconception
“Currency down 10% means prices up 10%.”
That’s the naive version. The real effect depends on product category, competitive dynamics, invoicing currency, and how concentrated the market is.
Headline translation
When you read: “Currency collapse will explode inflation,” translate it as: “Inflation risk rises; the magnitude depends on pass-through and policy response.”
A concrete example
A retailer importing electronics faces a weaker currency. It may raise prices 5%, accept 3% margin hit, and renegotiate with suppliers for 2%. That’s pass-through in action.
If you only remember one thing…
Pass-through is about behavior, not arithmetic.
Research that uses this concept
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