Understanding the global drivers of inflation: How important are oil prices?

Abstract

This paper examines the global drivers of inflation in 55 countries over 1970–2022. The paper estimates a factor-augmented vector autoregression model for each country and assesses the importance of several domestic and global shocks, including oil price shocks. It reports three main results. First, global shocks have explained about 26% of inflation variation in a typical economy. Oil price shocks accounted for only about 4% of inflation variation, but they had a statistically significant impact on inflation in three-quarters of the countries. Second, global shocks have become more important in driving inflation variation over time. The share of inflation variance caused by oil price shocks increased from 4% prior to 2000 to roughly 9% during 2001–22. They also accounted for some of the steep runup in inflation between mid-2021 and mid-2022. Third, oil price shocks tended to contribute significantly more to inflation variation in advanced economies, countries with stronger global trade and financial linkages, commodity importers, net energy importers, countries without inflation-targeting regimes, and countries with pegged exchange rate regimes. The headline results are robust to a wide range of sensitivity exercises—including alternative measures of global factors and oil prices—and aggregation of countries.