How Large and Persistent is the Response of Inflation to Changes in Retail Energy Prices?

Author: Mr. Chadi Abdallah and Mr. Kangni R Kpodar

Volume/Issue: Volume 2020 Issue 093

Publication date: June 2020

ISBN: 9781513546094

$18.00

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Topics covered in this book

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Inflation , Economics- Macroeconomics , WP , price , standard deviation , fuel price shock , spiral effects , shocks lead , wage-price spiral effects , energy price , price shock , Fuel prices , Inflation , Energy prices , Oil prices , Personal income , Global , Retail fuel prices , local projections , asymmetries , non-linearity , inflation response

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Summary

We estimate the dynamic effects of changes in retail energy prices on inflation using a novel monthly database, covering 110 countries over 2000:M1 to 2016:M6. We find that (i) inflation responds positively to retail energy price shocks, with effects being, on average, modest and transitory. However, our results suggest significant heterogeneity in the response of inflation to these shocks owing to differences in factors related to labor market flexibility, energy intensity, and monetary policy credibility. We also find compelling evidence of asymmetric effects—under sufficiently large shocks—in the case of high-income and low-income countries, with increases in retail fuel prices inducing larger effects on inflation than decreases in fuel prices.