Do High Oil Prices Presage Inflation? The Evidence from G-5 Countries

Abstract

Abstract:We estimate the effects of oil price changes on inflation for the United States, United Kingdom, France, Germany, and Japan using an augmented Phillips curve framework. We supplement the traditional Phillips curve approach taking into account the growing body of evidence suggesting that oil prices may have asymmetric and nonlinear effects on output and that structural instabilities may exist in those relationships. Our statistical estimates suggest current oil price increases are likely to have only a modest effect on inflation in the U.S, Japan, and Europe. Oil price increases of as much as 10 percentage points will lead to direct inflationary increases of about 0.1-0.8 percentage points in the U.S. and the E.U. Inflation in Europe, traditionally thought to be more sensitive to oil prices than in the U.S., is unlikely to show any significant difference in sensitivity from that in the United States and in fact may be less in some countries.

Financial and monetary policy responses to oil price shocks: evidence from oil-importing and oil-exporting countries

“…Turning to the net oil-exporting countries; a positive oil price shock in Russia causes a positive response of inflation; a response which is immediate and of high magnitude, suggesting demand-side inflation (see, inter alia, Bjornland, 2009;LeBlanc and Chinn, 2004;Hooker 2002). The effect of oil price increases on inflation disappears rapidly (one to two months later) and eventually becomes negligible eight months after the shock.…”

“…On the other hand, an oil-importing country immediately faces supply driven inflation in the case of a positive oil price shock and cost of production is expected to rise because oil, in its various forms, is one of the most basic inputs of production (Arouri and Nguyen, 2010;LeBlanc and Chinn, 2004;Hooker, 2002;Abel and Bernanke, 2001;Backus and Crucini, 2000;Kim and Loungani, 1992;Barro, 1984). Increased costs will be passed on to consumers, consumer prices will rise and this in turn will result in relatively low levels of aggregate demand; see, for example, Abel and Bernanke (2001), Hamilton (1996), Hamilton (1988) and Barro (1984).…”

How Indian CPI and Industrial Production Respond to Global Oil Price Shocks? Regime-Dependent Impulse Responses

“…The authors used a Vector Autoregressive (VAR) framework with seven variables and evidenced a major influence of oil prices on industrial production and inflation for USA and Canada and only limited influence in respect of other three countries. Similarly the study undertaken by LeBlanc and Chinn [30] for five developed countries (USA, UK, Germany, France and Japan) evidenced only a moderate impact of oil prices on inflation. Gisser and Godwin [21] used St. Louis type equations to study the nexus between oil prices and macroeconomic variables in the USA from 1962-1982.…”

Inflationary effects of oil prices and domestic gasoline prices: Markov-switching-VAR analysis

“…The relevant literature includes the following studies: Kahn and Hampton (1990), Huntington (1998), LeBlanc and Chinn (2004), Cunado and Perez de Gracia (2005), Ewing and Thompson (2007), Farzanegan andMarkwardt (2009), De Gregorio et al (2007), Tang et al (2010), andÁ lvarez et al (2011). These studies reveal that inflation is affected by oil price.…”

“…Kahn and Hampton (1990) investigate whether increases in oil price affect the U.S. economy and find that in the short run, higher oil prices can increase inflation and lower real GNP. Huntington (1998) examines the linkages between oil price and inflation from a different perspective and finds that consumer prices appear to respond asymmetrically to energy price increase and decrease in the U.S. LeBlanc and Chinn (2004) show that oil price increases are likely to have only a modest effect on inflation in the U.S., Japan, and Europe. By taking a nonlinear relationship into account, Cunado and Perez de Gracia (2005) report that oil prices have permanent effects on inflation and asymmetric effects on the GNP in European countries.…”