Headline Inflation Research Articles

Do petrol prices affect inflation and inflation expectations? Evidence from New Zealand

Due to their high visibility, petrol prices shape households' inflation expectations. This paper investigates the dynamic effects of petrol price shocks on one- and five-year inflation expectations in New Zealand; effects on headline and core inflation are also analyzed. Estimating partially identified structural vector autoregression models using Bayesian techniques, we show that petrol price shocks had a slightly delayed but persistent effect on one-year inflation expectations, whereas five-year inflation expectations were largely insensitive to these shocks. We also show that headline inflation increased immediately in response to petrol price shocks, while core inflation remained unaffected. Counterfactual analysis reveals that inflation and inflation expectations would have been higher in the absence of petrol price shocks during the second half of 2020. The results underscore the importance of petrol prices in influencing households' short-term inflation expectations, offering valuable insights for policymakers focused on managing the cost of living and inflation expectations in New Zealand.

Climate Change's Effect on Household Food Security in Sub-Saharan Africa and Optimal Monetary Policy

The resurgence of food insecurity in Sub-Saharan Africa during the past decade highlights the need to comprehend the phenomenon within a framework that includes all economic agents in these times of intensification of climate change. Thus, this paper, using a Dynamic Stochastic General Equilibrium (DSGE) model, analyzes the effects of climate shocks occurring in agricultural and non-agricultural sectors on household food security in Sub-Saharan Africa, while determining optimal monetary policy responses to mitigate these adverse effects. Findings highlight that climate shocks affecting the non-agricultural sector are more detrimental to long-term household food security than those affecting the agricultural sector, particularly for urban households. To mitigate these effects, flexible policies targeting food price inflation and headline inflation seem appropriate for rural and urban households, respectively. Nevertheless, in the absence of political and social pressure, flexible headline inflation targeting is optimal for mitigating climate shocks effects on Sub-Saharan Africa's food security.

Greenflation, a myth or fact? Empirical evidence from 26 OECD countries

Among the various effects of the green transition on the macroeconomy, we examined the unintended effects of the green transition on inflation, the so-called “greenflation”. We analyzed panel data from 26 OECD countries covering the period from 2005 to 2019 using four models based on the New Keynesian Phillips curve model. To date, only a few studies have examined greenflation, particularly in terms of empirical investigation. The main contribution of this study to the literature is to provide empirical evidence of greenflation. We also provide empirical evidence on the issues in the NKPC literature that the output gap better explains inflation dynamics than unit labor costs and confirm the demise of the Phillips curve. Estimates from the Common Correlated Effect Mean Group (CCEMG), Augmented Mean Group (AMG), and Panel Corrected Standard Error (PCSE) models indicate that the green transition has an upward inflationary impact on headline inflation, but no significant impact on core inflation. In addition, we have examined four circumstances under which the green transition may affect inflation that have not been sufficiently discussed in the literature: increased green transition spending, carbon pricing, increased demand for critical minerals, and the low energy density of renewable energy. Each of these circumstances has the potential to exert both upward and downward pressures simultaneously. Our suggestion to policymakers is that they do not yet need to change their current view of monetary policy with respect to greenflation, but they should carefully consider policy designs that take into account the unintended effects of the energy transition.

Oil jump tail risk as a driver of inflation dynamics

In this paper, we look at the role of various oil jump tail risk measures as drivers of both U.S. headline and core inflation. Those measures are first computed from high-frequency oil future prices and are then introduced into standard regression models in order to (i) assess in-sample determinants of inflation, (ii) assess overtime the evolution of inflation drivers, (iii) estimate impulse response functions and (iv) forecast inflation out-of-sample for various horizons. Empirical results suggest that oil jump tail risk measures contain useful information to describe inflation dynamics, generally leading to upward inflationary pressures. Even after controlling from standard variables involved in a Phillips curve, goodness-of-fit measures show evidence of a gain, in particular for headline inflation. Overall, we observe that oil jump tail risk measures are contributing more to inflation dynamics since the Covid-19 crisis.

Understanding the international rise and fall of inflation since 2020

This paper analyzes inflation dynamics in 21 advanced and emerging market economies since 2020. We decompose inflation into core inflation as measured by the weighted median inflation rate, and headline shocks—deviations of headline inflation from core. Headline shocks occurred largely on account of energy price changes, although food price changes and indicators of supply chain problems also played a role. We explain the evolution of core inflation with two factors: the strength of macroeconomic conditions—measured by the unemployment gap, the output gap, and the ratio of job vacancies to unemployment—and the pass-through into core inflation from past headline shocks. We conclude that the international rise and fall of inflation since 2020 largely reflected the direct and pass-through effects of headline shocks. Macroeconomic conditions generally played a secondary role. In the United States, estimated price pressures from strong macroeconomic conditions had been greater than in other economies but have eased.

Energy shocks in the Euro area: Disentangling the pass-through from oil and gas prices to inflation

We develop a Bayesian Structural VAR model to study the relationship between different energy shocks and inflation dynamics in Europe. Specifically, we model the endogenous transmission from shocks identified by the global market of crude oil and the European natural gas market to two target macroeconomic variables, i.e. inflation expectations and realized headline inflation rate. Our results demonstrate that, since the post-pandemic recovery, inflation in the Euro area is mostly driven by energy price shocks and aggregate supply factors. In particular, the high peaks of the Eurozone inflation are mostly associated with natural gas supply shocks.

From bottlenecks to inflation: Impact of global supply-chain disruptions on inflation in select Asian economies

Supply-chain bottlenecks emerged alongside unprecedented inflationary surges amid the resulting mismatches in supply and demand for goods and services throughout the COVID-19 pandemic. This study employs a local projection approach to investigate the inflationary impact of global supply-chain pressures in the Philippines and select East Asian neighbors. We find that supply-chain disruptions are followed by sizable and statistically significant increases in headline inflation in the Philippines, Rep. of Korea, Thailand, and Singapore. Supply-chain shocks also have a considerable impact on the tradable segment of core inflation. Meanwhile, non-tradable inflation has a generally smaller, short-lived, and insignificant response to global supply-chain pressures reflecting the limited presence of second-round, indirect effects.

Geopolitical risk, supply chains, and global inflation

AbstractThis paper investigates the effects of global geopolitical risks and global supply chain pressures on global inflation for the monthly period of 1999M1–2022M12. The investigation is based on a structural vector autoregression model, where the effects of global oil prices and global monetary policy are controlled for. Four alternative measures of inflation are used, including headline, core, food, and energy inflation. The empirical results show that disruptions in global supply chains are the main drivers of global inflation in the long run as the corresponding shocks explain the lion's share of volatilities in headline inflation (by 32%), core inflation (by 30%), and food inflation (by 22%), followed by oil price shocks and policy rate shocks. In comparison, energy inflation is explained the most by oil price shocks (by 55%) followed by supply chain shocks and policy rate shocks. Positive supply chain pressure and oil price shocks have positive and statistically significant effects on headline inflation even after five years, whereas positive policy rate shocks have negative and statistically significant effects on headline inflation in the long run. In contrast, positive shocks to geopolitical risk result in higher headline inflation only up to one year, with insignificant effects in the long run. Several policy implications follow.

Reading consumers’ minds: an analysis of inflation expectations

ABSTRACT The heterogeneity in households’ consumption baskets is often deemed responsible for deviation of their inflation expectations from headline inflation. The paper verifies this by simulating population baskets and estimating mean inflation by sampling baskets. The estimated mean inflation fails to display closeness with survey numbers. Therefore, the paper proposes alternative logical methods for designing basket compositions and identifies the most suited method using which the estimated expectations are found to be close to and well-correlated with survey numbers. The findings suggest that a sudden rise in inflation of regular-use items can explain the deviation in households’ expectations from official inflation.

JUE insight: Differences in rent growth by income from 1985 to 2021 and implications for inflation

Shelter is a large share of household expenditures and therefore has a large weight in inflation measurement. Because rich and poor households tend to make different housing and location choices, does the shelter component of inflation differ across the income distribution? I calculate rent growth for households in each quintile of the income distribution from 1985 to 2021 and find modestly lower rent growth for lower-income groups. However, because lower-income households spend a larger fraction of total expenditures on housing, I find little difference across groups in headline inflation. Therefore, different housing and location choices have not generated materially different shelter components of inflation across the income distribution.

Re-Estimating Inflation Threshold Level for Tanzania

The study seeks to estimate the relationship between inflation and economic growth, as well as the headline inflation threshold level beyond or below which Tanzania’s economic growth is constrained. This was achieved through the Ordinary Least Squares (OLS) regressions employing quarterly data spanning the period 2001:1 to 2021:4. The findings suggest that the coefficient of inflation variable that captures the effect of low inflation on growth is statistically significant and positive, implying that low inflation is pro-growth. One percent increase in inflation leads to an economic growth of 0.352 percent. Furthermore, the coefficient of the high inflation proxy variable has a negative sign with the inflation threshold level being seven percent. At this level, the total effect of inflation on growth is estimated at 0.3494 percent. Moreover, optimal inflation levels of one to three percent have no impact on growth, as mirrored by invariable adjusted R2.The recommendations from the results of this study are three-fold. First, the Bank of Tanzania may consider inflation targets below seven percent but above three percent in the monetary policy planning to continue supporting economic growth. Second, since the Bank has largely depended on inflation behaviour in informing inflation targets to choose, which ended into picking targets far from the optimal inflation, it is essential that the Bank also benefits from empirically estimated threshold rates. Third, in order to utilize any new information emanating from structural changes and developments in the economy, inflation threshold level should be re-estimated regularly.

Consumption categories, household attention, and inflation expectations: Implications for optimal monetary policy

What inflation measure should central banks target? This paper highlights a mechanism where monetary policy optimally targets headline inflation if households pay limited attention to different consumption categories when forming inflation expectations. This result stands in contrast to standard rational expectations models, where optimal policy targets core inflation. The core inflation rate excludes volatile energy and food prices (non-core) from headline inflation. Using novel survey data on inflation expectations for disaggregated consumption categories, I find household expectations are disproportionately driven by beliefs about future non-core prices. A model of bounded rationality accounts for the empirical evidence. While forming inflation expectations, households pay more attention to the volatile non-core components. Embedding this framework into a multi-sector New Keynesian model, I show that targeting headline rather than core inflation provides welfare gains.

Food habits and food inflation in the US and India; An experience in Covid-19 pandemic

The US and India are different in various socioeconomic aspects. Still the inflation are rates between them showed moderately correlated in respected in respect of food prices 2022. Both countries adopted necessary measures to supply food and beverages in the lockdown and related bottlenecks in order to check the rapidly rising commodity prices. But still the food prices increased continuously almost in the whole year,2022. Food and fuel have been said the drivers of inflation during the Covid-19 pandemic period (Philip Barrett Sep,12,2022). The world itself was partially a closed economy as foreign trade dwindled to a large extent. So countries had to depend mostly on indigenous production and market supply network. But as the food and beverage demand, it is dependent on economic factors like testes, habits and preference of the households. These factors played important role in the head line inflation in different countries during Covit-19 pandemic. The present study is an attempt to highlight the complex factors such as food habits ,tastes and preferences in the US and India. This shows how the said factors impacted upon the food inflation in them.

Psychological inflation: Definition and measurement

Conventional monetary policy tools became less effective, with nominal short-term interest rates approaching the zero-lower bound during COVID-19. Instead, central banks adopted a range of unconventional monetary policies. Thus, perceived inflation has become a key channel for monetary policy transmission. Despite how vital perceived inflation is, quantifying perceived inflation with accuracy remains questionable and challenging. As a result, we focus on developing a novel measurement of perceived inflation - the psychological inflation index. Our approach is based on psychological theories and considers loss aversion, which creates advancements to previous versions. The new index satisfies many expected criteria: (i) it broadly co-moves with the headline inflation index during everyday contexts; (ii) it captures abnormal price evolution better than headline inflation during crisis periods; (iii) it links tightly with monetary policy and economic dynamics. Psychological inflation, therefore, might be helpful in forecasting headline inflation, estimating real interest rates, predicting economic players' behavior, and setting salaries and prices. Psychological inflation, combined with headline inflation, provides a clearer picture of the credibility of monetary policy.

The causal relationship between income inequality and economic growth: evidence from panel data for Vietnam

ABSTRACT By analysing a panel dataset of 63 provinces of Vietnam (2004 − 2021), this study demonstrated that there was a causal relationship between income inequality (measured by the Gini coefficient, income gap, and the income share of the top 20%) and economic growth (expressed by real GDP per capita). The Kuznets curve, which is a well-known inverted U-shaped relationship between real per capita GDP and income inequality, was found by applying the robust fixed-effects method (FEM). In Vietnam during 2004 − 2021, economic growth first increased income inequality and later reduced it at a higher stage of economic development. This empirical evidence demonstrates that the Kuznets curve is an apparent empirical phenomenon in both national and provincial data. The Two-step System GMM Estimation examined the impact of income inequality and other socioeconomic factors on GDP per capita and showed the significant positive impact of income inequality, investment, employment rate, and education attainment, as well as a significant negative impact of headline inflation and the urbanization rate on economic development. Moreover, the results show that not literacy rate but educational attainment (the percentage of the population aged 15 years and older with a bachelor’s degree or higher) significantly influence economic growth.

Global warming and heat extremes to enhance inflationary pressures

Climate impacts on economic productivity indicate that climate change may threaten price stability. Here we apply fixed-effects regressions to over 27,000 observations of monthly consumer price indices worldwide to quantify the impacts of climate conditions on inflation. Higher temperatures increase food and headline inflation persistently over 12 months in both higher- and lower-income countries. Effects vary across seasons and regions depending on climatic norms, with further impacts from daily temperature variability and extreme precipitation. Evaluating these results under temperature increases projected for 2035 implies upwards pressures on food and headline inflation of 0.92-3.23 and 0.32-1.18 percentage-points per-year respectively on average globally (uncertainty range across emission scenarios, climate models and empirical specifications). Pressures are largest at low latitudes and show strong seasonality at high latitudes, peaking in summer. Finally, the 2022 extreme summer heat increased food inflation in Europe by 0.43-0.93 percentage-points which warming projected for 2035 would amplify by 30-50%.

The Russian invasion of Ukraine and the exchange rate of the Polish zloty: A fallacy of monetary autonomy?

Abstract We use the Twitter application programming interface to construct a novel indicator capturing the varying perceptions of geopolitical risk related to the war in Ukraine. We show that the Twitter variable is a statistically significant determinant of the EUR/PLN exchange rate following the invasion. We estimate that the war in Ukraine was responsible for an increase in the EUR/PLN exchange rate of about 5.0% in the first 2 weeks following its breakout and that the weakening of PLN contributed to an increase of headline inflation in Poland by about 0.33 percentage points. Our findings suggest that monetary policy autonomy can be substantially constrained due to conflicts in nearby countries. Therefore, they provide an argument for Poland in seeking Eurozone membership as a way to contain the impact of geopolitical factors on exchange rate volatility, which is likely to remain at play in the longer run.

Weighted Median Inflation Around the World: A Measure of Core Inflation

The standard measure of core or underlying inflation is the inflation rate excluding food and energy prices. This paper constructs an alternative measure, the weighted median inflation rate, for 38 advanced and emerging economies using subclass level disaggregation of the CPI over 1990–2021, and compares the properties of this measure to those of standard core. For quarterly data, we find that the weighted median is less volatile than standard core, more closely related to economic slack, and more closely related to headline inflation over the next year. The weighted median also has a drawback: in most countries, it has a lower average level than headline inflation. We therefore also consider a measure of core inflation that eliminates this bias, which is based on the percentile of sectoral inflation rates that matches the sample average of headline CPI inflation.

Perceived inflation in the Vietnamese economy: New points in methodology and applications

Researching and developing methods to measure perceived inflation is an indispensable requirement for the monetary policy management of the State Bank of Vietnam, especially in the context of interest rate amplitudes. remains at the lowest level in history in Vietnam. This study was conducted in that context with the goal of developing a tool to measure perceived inflation based on a solid methodological foundation. The result is the creation of a new measure, integrating the psychological 'gain-loss' effect of consumers on price fluctuations. In particular, the final product is an integrated website, allowing automation of the research and analysis process. The results of the study provide evidence of overstated consumer inflation perceptions during periods of economic volatility, when perceived inflation is significantly higher than the headline inflation (CPI). These findings not only have academic value but are also important in supporting the State Bank of Vietnam in evaluating and operating monetary policy, especially in identifying and dealing with fluctuations in perceived inflation in the economy. From the results of this study, we call for participation and suggestions from the experts, with the aim of minimizing the undesirable effects of inflation and supporting the maintenance of a stable inflation rate, contributing to Vietnam’s economic growth in 2024.

Monetary Policy in an Oil-Exporting Emerging Economy with Fuel Subsidies

This paper develops a DSGE model for an emerging oil-exporting economy with a fuel subsidy regime to analyse the stabilising role of alternative monetary policy rules under different subsidy arrangements. The model is estimated via Bayesian methods using data for Nigeria from 2000Q2 to 2019Q4. This paper (i) estimates a domestic fuel pricing rule for an oil-exporting emerging economy of Nigeria with fuel subsidies, (ii) characterizes monetary policy behaviour under such an estimated fuel pricing rule, and (iii) evaluates the appropriateness of alternative monetary policy rules under different assumptions regarding the fuel subsidy regime. The results show that approximately 45 per cent of changes to the global oil price are transmitted to the retail price of fuel. Also, it was found that the behaviour of monetary policy in Nigeria has been characterised by the headline inflation monetary rule. However, the monetary authority is able to reduce policy loss by approximately 11 per cent if it targets core inflation rather than a measure of inflation that includes energy prices. Under a zero-subsidy regime, the core inflation monetary rule outperforms its competitors in achieving overall macroeconomic stability, provided the share of oil in total consumption is relatively low.