Abstract
Quantifying the magnitude and establishing the timing of the pass-through of oil price changes to consumer prices is crucial for forecasting inflation. Characterizing this pass-through is particularly important because oil prices tend to undergo wide fluctuations. In this note we presented estimates of the oil price pass-through into consumer prices both in the US and in the euro area.
Highlights
Quantifying the magnitude and establishing the timing of the pass-through of oil price changes to consumer prices is crucial, so because oil prices tend to undergo wide fluctuations
We show that an oil price change passes-through core personal consumption expenditure (PCE) prices only via its effect on the whole economy, while the direct effect via the cost channel is null
Had we found that this pass-through was statistically significant for many prices, than this would have violated some of the assumption of the approximate dynamic factor model in (1), and would have pointed at the existence of additional factors. (III) As we explained above, we are working under the assumption that all the components of π t are stationary
Summary
Quantifying the magnitude and establishing the timing of the pass-through of oil price changes to consumer prices is crucial, so because oil prices tend to undergo wide fluctuations. What is the effect of such a large swing in oil prices on core inflation? Oil price fluctuations affect consumer inflation through both its energy component and the non-energy components. Despite extensive evidence that changes in the oil price contribute to macroeconomic fluctuations (see Hooker, 1996; Barsky and Kilian, 2002; Kilian, 2008b, 2009a,b; Kilian and Vigfusson, 2011, 2017, among others), various authors have shown that the pass-through of oil price changes to core prices has declined since the mid-eighties (see Hooker, 2002; Chen, 2009; Clark and Terry, 2010, among others) up to the point that it is very limited if not zero (for example Cavallo, 2008; Clark and Terry, 2010)
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