Oil price pass-through into inflation in Spain at national and regional level
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Oil price pass-through into inflation in Spain at national and regional level Ligia Topan2
· César Castro1 · Miguel Jerez2 · Andrés Barge-Gil2
Received: 2 January 2018 / Accepted: 28 September 2020 © The Author(s) 2020
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. Keywords Inflation · Deflation · Oil price · Forecasting · Simulation JEL Classification E31 · E37 · Q43
1 Introduction 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
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Ligia Topan [email protected] César Castro [email protected] Miguel Jerez [email protected] Andrés Barge-Gil [email protected]
1
Department of Economics, Universidad Pública de Navarra, Pamplona, Spain
2
Department of Economic Analysis and Quantitative Economics, Universidad Complutense de Madrid, Madrid, Spain
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countries and around 25% in Spain. This view has been challenged by several works showing that the influence of oil price on inflation decreased in the last decades (see, e.g., Hooker 2002; De Gregorio et al. 2007). However, in the last years there have been several sharp downward fluctuations in oil prices, with decreases in its 12-month rate around − 50% and − 30% in January 2015 and January 2016, followed by a sharp 80% increase in January 2017. Our interest in studying the relationship between changes in oil prices stems from this new scenario that has been even exacerbated due to the COVID-19 pandemic. According to the Spanish Institute of Statistics (hereafter, INE), the 12-month Consumer Price Index (CPI) inflation in Spain stood at negative values during most 2016, with a minimum of − 1.1% in April, and recovered during 2017, with a peak of 3% in January and February. There was also a remarkable heterogeneity in inflation among the different regions,1 with values ranging from − 1.5% in Castile-La Mancha to − 0.7% in the Basque Country. The main goal of this work consists in measuring the ‘pass-through’ of changes in oil prices into inflation. Accordingly, we measure and analyze this effect in Spain, at both national and region levels, also making the distinction between the energy and non-energy components of the CPI. Our basic approach is similar to that in Castro et al. (2016): we first fit a times serie
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