Accessible Version
Second-Round Effects of Oil Prices on Inflation in the Advanced Foreign Economies, Accessible Data
Figure 1. Oil Prices and Inflation in Selected Advanced Economies
Brent Crude Prices
The left panel shows the price of Brent crude oil in dollars per barrel over the years 2015-2023. The figure shows that Brent prices fluctuated in the years 2015-2019 before dropping to below $30 a barrel in early 2020. Prices then increased over the course of 2020 and 2021, reaching a peak near $130 a barrel before dropping to below $80 a barrel. Prices have since moved back up to about $90 a barrel.
Headline CPI
The right panel shows the evolution of the four-quarter trade-weighted headline inflation rate in selected AFEs, which includes Canada, the U.K., and the euro-area. The figure breaks down the headline inflation rate into the contribution of the core, food, and energy components. Prior to 2021, the contribution of core is relatively stable around 1 percentage point, with the contributions of food and energy fluctuating. After 2021, the contribution of all components grows, with a large portion of the inflation due to growth in the energy component. The energy bars begin shrinking in the fourth quarter of 2022.
Note: Aggregate represents the trade-weighted average of euro-area, Canada, and U.K. consumer price index (CPI) inflation.
Source: Office for National Statistics; Statistics Canada; Eurostat; Bloomberg; authors’ calculations
Figure 2. Effect of a 10 percent Increase in Oil Prices
Energy CPI
The left panel shows the estimated effect of a 10 percent increase in oil prices on the level of the energy CPI. A 10% increase in the price of oil raises the energy CPI by about 1.5 percent on impact, grows to 2.3 percent two quarters after the shock, and stays relatively stable afterwards before dropping to below 2 percent after 8 quarters. The effects are all statistically significant.
Food CPI
The middle panel shows the estimated effect of a 10 percent increase in oil prices on the level of the food CPI. A 10 percent increase in the price of oil has no statistically significant effect on food CPI on impact. However, the effect grows over the course of 8 quarters before raising food CPI by around 0.3 percent 8 quarters after the shock. The effects are statistically significant from the third quarter on.
Core CPI
The right panel shows the estimated effect of a 10 percent increase in oil prices on the level of the core CPI. A 10 percent increase in the price of oil has a very small but statistically significant effect on core CPI on impact. The effect grows over the course of 8 quarters, raising the core CPI by about 0.1 percent 8 quarters after the shock. The effects are all statistically significant.
Note: Assumes a 10 percent permanent increase in the price of crude oil. Dashed lines show 95% confidence intervals based on robust standard errors, clustered at the country level. AFE is advanced foreign economy.
Source: Haver Analytics; Bloomberg; Kilian (2009); Authors’ calculations.
Figure 3. Effects of Oil Prices on Headline Inflation in Selected Advanced Economies
Figure 3 decomposes the trade-weighted headline inflation rate in Canada, the U.K., and the euro-area into the direct contribution of oil prices, the second-round contribution of oil prices, and other factors. The direct contribution is given by the estimated effect of oil prices on the energy CPI, while the second-round contribution is taken from the estimated effect of oil prices on the food and core CPI. Direct effects are negative through 2019 and 2020, with second-round effects turning negative as well in the second quarter of 2020. Direct effects are positive and growing from the first quarter of 2021 through the second quarter of 2022, contributing around a percentage point to headline inflation in some quarters. Direct effects then decrease before turning negative in the first two quarters of 2023. Second-round effects turn positive in the first quarter of 2022 and grow to contribute 0.6 percentage points to headline inflation in the fourth quarter of 2022. Second-round effects remain positive in the first and second quarter of 2023.
Note: Black line represents data for the trade-weighted average of euro-area, Canada, and U.K. headline inflation.
Source: Office for National Statistics, Statistics Canada, Eurostat, Bureau of Economic Analysis all via Haver Analytics; authors’ calculations; authors’ calculations.
Figure 4. Second-Round Effects of a 10 Percent Increase in Oil Prices due to an Identified Shock
Supply Shock
Food CPI
The top left panel shows the effect on food CPI of a 10 percent increase in the price of oil due to a supply shock. The effect grows over 8 quarters before reaching just over 0.6 percent 8 quarters after the shock. The effect is significant from the sixth quarter on.
Core CPI
The top right panel shows the effect on core CPI of a 10 percent increase in the price of oil due to a supply shock. The effect grows over 8 quarters before reaching about 0.3 percent 8 quarters after the shock. The effects are all statistically significant.
Economic Activity Shock
Food CPI
The top left panel shows the effect on food CPI of a 10 percent increase in the price of oil due to an economic activity shock. The effect grows over 8 quarters before reaching just over 1 percent 8 quarters after the shock. The effect is significant from the fifth quarter on.
Core CPI
The top right panel shows the effect on core CPI of a 10 percent increase in the price of oil due to an economic activity shock. The effect grows over 8 quarters before reaching about 0.6 percent 8 quarters after the shock. The effect is significant from the fifth quarter on.
Oil-specific Demand Shock
Food CPI
The top left panel shows the effect on food CPI of a 10 percent increase in the price of oil due to an oil-specific demand shock. The effect is not significantly different from zero at any horizon.
Core CPI
The top right panel shows the effect on core CPI of a 10 percent increase in the price of oil due to an oil-specific demand shock. The effect is not significantly different from zero at any horizon.
Note: Assumes a 10 percent permanent increase in the price of crude oil due to the specified identified shock. Dashed lines show 95% confidence intervals.
Source: Office for National Statistics, Statistics Canada, Eurostat, Bureau of Economic Analysis all via Haver Analytics; Bloomberg Finance LP, Bloomberg Commodity Prices; Kilian (2009); Baumeister and Hamilton (2019); authors’ calculations.