Impact of oil price changes on domestic price inflation at disaggregated levels: Evidence from linear and nonlinear ARDL modeling

Abstract

In this study, linear and nonlinear autoregressive distributed lag (ARDL) models are applied to examine the symmetric and asymmetric pass-through effect of oil price changes on four domestic price indices in Malaysia. The main objective of this work is to compare how oil price changes affect domestic prices at different levels (production/output, import price, producer price, and CPI) across sectors. Our results show evidence of symmetric and asymmetric pass-through effects of oil price changes on domestic prices across sectors. Oil price changes lead to the positive effect of higher output growth but may directly cause higher import and production prices in the long run through cost channels. On the other hand, oil price changes have a limited direct effect on consumer prices in the long run. The impact of oil prices on consumer prices occurs indirectly through transmission from import prices and production costs. Sectors that are more oil-intensive experience a larger impact of oil price changes. Besides, the monitoring of monetary policy toward creating a low oil environment (for instance, by controlling consumer prices and providing oil subsidy) also matters in controlling the oil price impact on domestic price inflation.