Abstract
Oil price showed sharp fluctuations in recent years which revived the interest in its effect on inflation. In this paper, we discuss the relationship between oil price and inflation in Spain, at national and regional levels, and making the distinction between energy and non-energy inflation. To this end, we fit econometric models to measure the effect of oil price shocks on inflation and to predict them under different scenarios. Our results show that almost half of the volatility of changes in total inflation is explained by changes in oil price. As could be expected, the energy component of inflation drives this effect. We also find that, under the most likely scenarios, 1-year ahead total inflation will be moderate, with relevant differences across regions.
Highlights
The relevance of oil cost to determine consumer prices is conventional wisdom since the oil shocks of the 1970s, when inflation reached two digits in most industrializedSERIEs (2020) 11:561–583 countries and around 25% in Spain
Our results show that almost half of the volatility of changes in total inflation is explained by changes in oil price
Note that: (i) total and energy inflation display a high degree of comovement; (ii) there is virtually no pass-through to non-energy inflation; (iii) the contribution of oil prices to total inflation ranges from 1.811 to − 2.119 percentage points in some months, while the contribution to energy inflation ranges from − 16.494 to 16.292 percentage points; and (iv) the oil price pass-through is a major determinant of the deflation spells observed in 2009 and 2014–2016
Summary
The relevance of oil cost to determine consumer prices is conventional wisdom since the oil shocks of the 1970s, when inflation reached two digits in most industrialized. Álvarez et al (2011) analyze the impact of oil price shocks in Spain and the Euro Area They use a Dynamic Stochastic General Equilibrium (DGSE) model and conclude that oil price changes account for more than 50% of the variance of Spanish inflation (45% in the euro area). Gómez-Loscos et al (2011) is closer to our analysis, as their goal was to estimate the effect of oil price shocks on the inflation of different Spanish regions with a long-term perspective. They conclude that the effect was stronger in the 70s and increased again at the beginning of the twenty first century, after a spell of low sensitivity.
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