The deflationary effect of oil prices in the euro area

Abstract

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.

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

“…On the other hand, we introduce some methodological novelties in comparison with Castro et al. ( 2016 ) and other previous works. First, we use a conditional forecasting method which is equivalent to the one used by Castro et al.…”

“…Therefore, it reduces to computing model-based interpolations for eleven missing values (2020.03-2021.01) in a time series. Castro et al (2016) solved this problem using a state-space procedure known as 'fixed-interval smoothing' (see Anderson and Moore 1979). This method is precise, fast and efficient, but requires specialized software.…”

“…Our basic approach is similar to that in Castro et al. ( 2016 ): we first fit a times series model relating CPI with oil price. Its dynamic structure implies that the price of crude oil today affects prices in the same and the following month, with no feedback in the opposite direction of Granger ( 1969 ) causality (G-causality).…”

“…Note that converting oil prices to euro may confound variations in oil prices and exchange rates. FollowingCastro et al (2016), we separated both effects by means of a linear approximation and found that the effect of the exchange rate is not statistically significant, so our decision to use oil prices in euro is empirically justified.…”

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

“…We work with the oil price nominated in euros because it is the reference price for European consumers. Nonetheless, our results come from the analysis of the first differences of the series with seasonal treatment, so the gains of transfer functions would not change if we use the oil price nominated in euros or dollars (see,Castro et al 2016). …”