How large and persistent is the response of inflation to changes in retail energy prices?

Abstract

We estimate the dynamic effects of changes in retail energy prices on the consumer price level using a novel monthly database, covering 110 countries over 2000:M7 to 2016:M6. We find that (i) the price level responds positively to retail energy price shocks, with effects being, on average, modest and transitory. However, our results suggest significant heterogeneity across countries owing to differences in institutional factors. In particular, the response of the consumer price level to these shocks is relatively larger and more persistent in countries with less flexible labor markets, a lower energy intensity, a looser fiscal policy stance, and a less credible monetary policy. We also find evidence of non-linearity and asymmetry in the responses, with both positive and bigger energy price shocks leading to larger and more persistent effects on the consumer price level.