A new look at oil price pass-through into inflation: evidence from disaggregated European data (original) (raw)

Asymmetries in the transmission of oil price shocks to inflation in the eurozone

Economic Modelling, 2021

Theory predicts that the level of inflation in an economy and the trend in the prevailing inflation rate may affect how oil price shocks, through their influence on firms' expectations and price-setting behaviors, are transmitted to inflation. However, empirical evidence regarding this relationship is limited and calls for further exploration. Using data for 12 eurozone countries over the period from 1999 to 2020, we analyze how the inflation environment in which an oil price shock occurs influences its transmission. We find that the inflation environment is a determinant in the way oil supply shocks and oil-specific demand shocks are transmitted to inflation, with positive shocks displaying higher transmission in high inflation environments. Furthermore, transmission of shocks to core inflation, which represents an indirect effect, only occurs in high inflation environments. These findings highlight the need to consider the inflation environment in order to define appropriate monetary policies in response to inflationary pressures caused by oil price shocks.

Oil price pass-through into inflation in Spain at national and regional level

SERIEs

Oil price showed sharp fluctuations in recent years which revived the interest in its effect on inflation. In this paper, we discuss the relationship between oil price and inflation in Spain, at national and regional levels, and making the distinction between energy and non-energy inflation. To this end, we fit econometric models to measure the effect of oil price shocks on inflation and to predict them under different scenarios. Our results show that almost half of the volatility of changes in total inflation is explained by changes in oil price. As could be expected, the energy component of inflation drives this effect. We also find that, under the most likely scenarios, 1-year ahead total inflation will be moderate, with relevant differences across regions.

Oil Price Pass-Through into Inflation: The Evidence from Oil Exporting Countries

2016

This paper evaluates different channels of oil price pass through into inflation for the countries Azerbaijan, Kazakhstan and Russia. We propose a methodology to disentangle the effects of different channels after an oil price shock hits international markets. We measure the relative importance of the two distinct channels through which oil price shocks are transmitted into inflation in these economies. For that, we employ an approach which is in the spirit of the methodology proposed by Sims and Zha (1995). The empirical evidence shows that the level of inflation in these oil-exporting countries responds significantly to oil price shocks. The fiscal and cost channels are major amplifiers of the effects of oil price shocks on inflation. By providing new evidence from emerging oil-exporting countries, the paper also has important policy implications on the maintenance of price stability by central banks.

Another Pass-Through Bites the Dust? Oil Prices and Inflation

2007

This paper presents evidence of an important decline during recent decades in the pass-through from the price of oil to the general price level. We find that this decline is a generalized fact for a large set of countries. After documenting correlations between the consumer price index and oil prices, we use two estimation strategies in an attempt to properly identify the effect of oil shocks on inflation. First, we estimate the traditional Phillips curve augmented to include oil and test for structural breaks in 34 countries. This methodology shows a fall in the average estimated pass-through for industrial economies and, to a lesser degree, for emerging economies. Second, we estimate rolling vector autoregressions for a subsample of countries for which we have sufficient data. We derive impulse response functions of inflation to oil shocks and interpret the integrals as estimates of pass-through. We find that the effect of oil shocks on inflation has weakened for most of the 12 countries in the sample. Among the factors that might help to explain this decline, we argue that the most important are a reduction in the oil intensity of economies around the world, a reduction in the exchange rate pass-through, a more favorable inflation environment, and the fact that the current oil price shock is largely the result of strong world demand. These factors help to explain not only why the current shock has had limited inflationary effects, but also why it has had limited consequences for output.

Why Don’t Oil Shocks Cause Inflation? Evidence from Disaggregate Inflation Data

Journal of Money, Credit and Banking, 2011

This paper uses disaggregate U.S. inflation data to evaluate explanations for the breakdown of the relationship between oil price shocks and consumer price inflation. A data set with measures of inflation, energy intensity, labor intensity, and sensitivity to monetary policy is constructed for 97 sectors that make up core CPI inflation. A comparison of the 1973-85 and 1986-2006 time periods reveals that substitution away from energy use in production and monetary policy were both important, with approximately two-thirds of the change in response of inflation to oil shocks being due to reduced energy usage, and one-third to monetary policy. We find no evidence that other factors, such as changes in wage rigidities or changes in the persistence of oil shocks, played a role.

The deflationary effect of oil prices in the euro area

Energy Economics, 2016

The inflationary effect of oil price has been widely examined by academic literature. Nowadays, the main concern in the euro area (E.A.) is its deflationary effect. In this paper we propose a method to evaluate the effect of oil price changes on inflation as well as an indicator of inflation adjusted for the short-term effect of oil prices, which is aimed to assess the risk of deflation in real time. We illustrate the practical applications of these tools by predicting the evolution of inflation in the E.A., conditional to different scenarios of oil price deflation. Our main finding is that no deflationary scenario for oil prices results in a negative inflation rate forecast for October 2016, despite oil price variation accounting for 25% of the variance of changes in inflation.

The impact of oil prices on products groups inflation: is the effect asymmetric?

2020

In this paper we assess the oil price pass-through into both, the global inflation in Spain and the inflation derived from the non-deterministic prices of the standard European classification of product groups, during the period 2002-2018. To this end we fit a transfer function to inflation in each group, extended to allow for an asymmetry in the transmission of positive/negative oil cost shocks, that is, a “rockets and feathers effect”. Our results show that most often there is a significant asymmetry, which can be explained by the degree of competition in each market.

Oil Prices and Inflation Dynamics

IMF Working Papers

We study the impact of fluctuations in global oil prices on domestic inflation using an unbalanced panel of 72 advanced and developing economies over the period from 1970 to 2015. We find that a 10 percent increase in global oil inflation increases, on average, domestic inflation by about 0.4 percentage point on impact, with the effect vanishing after two years and being similar between advanced and developing economies. We also find that the effect is asymmetric, with positive oil price shocks having a larger effect than negative ones. The impact of oil price shocks, however, has declined over time due in large part to a better conduct of monetary policy. We further examine the transmission channels of oil price shocks on domestic inflation during the recent decades, by making use of a monthly dataset from 2000 to 2015. The results suggest that the share of transport in the CPI basket and energy subsidies are the most robust factors in explaining cross-country variations in the eff...