For how long do higher energy prices affect product prices?

Prices in global commodity markets can go up and down very quickly. This is particularly true of energy prices (see Figure 1). For example, energy prices rose more than 500% between April 2020 and August 2022, due in part to the Russian invasion of Ukraine and increased uncertainty about gas supplies. They have subsequently halved since August 2022.  

Figure 1: Global commodity prices (in USD)

When the prices of energy and other raw materials and commodities (such as wood, iron and grains) rise, this affects the production costs of the firms that use them to produce goods and services. In response, these firms may raise the prices of their own products. Most firms will not adjust their prices immediately, however, for instance because prices are fixed in a contract or for fear of losing customers.

The magnitude of the knock-on effect and the speed with which it materialises depend on the sector in which a firm operates. Whereas the impact on petrol prices, for example, is almost immediate, it takes much longer for energy prices to affect meat, dairy and bread prices. So the pace varies widely.

Figure 2 shows both the magnitude and pace of the knock-on effect in a number of Dutch sectors. This reveals the following about the impact of global commodity prices on the price of automotive fuels: the blue bar shows that two years after an increase in commodity prices, consumer fuel prices have increased by over one-fourth of the percentage increase in commodity prices. The corresponding yellow dot shows that this effect largely manifests itself already within one month of the change in commodity prices. This should come as no surprise, as fuel prices at petrol stations are typically adjusted on a daily basis. Prices of many other products are not affected within one month, which is why their yellow dot is close to 0%. While prices of package holidays do respond to changed energy prices within one month, their full adjustment takes up to two years.

Figure 2: Impact of commodity price changes on prices in different sectors

Higher commodity prices affect many other products much more gradually. Figure 2 also shows that food prices respond to changing commodity prices with a significant lag. The prices of dairy, meat, bread and alcoholic and non-alcoholic beverages do not reflect changes in the first month after a commodity price has changed. Instead, it takes some time before they start to move with commodity prices. 

High commodity prices push inflation higher for two years

We found that inflation is still up two years after a rise in commodity prices. After that, the knock-on effect abates. Over the past two years, energy prices have first increased and then decreased. Accordingly, they currently have both an upward and a downward effect on inflation. On the one hand, the fact that they have been falling since mid-2022 is having a downward effect on inflation. On the other hand, however, the gradual impact that commodity prices have on inflation means that previous increases in energy prices still have an upward effect on inflation, for instance through the lagged effect on food prices.