In this study, we explore the pass-through of exchange rate (ERPT) fluctuations to aggregate consumer price index (CPI) and its components, namely food, non-food, and services components in Azerbaijan. Using quarterly data for the period 2003 to 2021, we estimate VAR models, derive impulse response functions and run variance decompositions with the Cholesky ordering. We find significant but incomplete pass-through on all components. The accumulated pass-through to aggregate CPI is 40 percent within one year. According to our empirical findings, the largest ERPT is observed in the food component of CPI, which is 53 percent after four quarters period. The corresponding pass-through coefficients for non-food and services CPI are 35 and 19 percent respectively. Variance decomposition tables show that, intuitively the exchange rate shock plays more important role on food and non-food components compared to services components. Since the ERPT is an essential ingredient of price developments in Azerbaijan, it should be assessed precisely and taken into account in monetary policy decisions and inflation forecasting.
 

Keywords: Exchange rate pass-through, VAR model, food CPI, non-food CPI, services CPI, impulse response functions

JEL classification: F31, E31, E52, C51, C52