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Is Oil Price Still Driving Inflation?

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In this paper, we empirically investigate the effects of oil price changes on inflation over the period 1991-2016 for eight industrial countries: the United States, Canada, Japan, Australia, Germany, France, Italy, and the UK. In doing so, we use an oil-augmented Phillips curve with unobserved components and we consider time-varying coefficients. The results show that even over a period of low and stable inflation, oil prices play a significant role in the dynamics of inflation. In all the countries except Germany, oil pass-through into inflation increased from the early 2000s up until the global financial crisis. In the United States it has nearly doubled in the last fifteen years. These findings suggest that central banks must continue to monitor oil prices closely.

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Keywords: Energy and the economy, Oil price, Inflation, Phillips curve, Unobserved components models

DOI: 10.5547/01956574.40.6.pren

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Published in Volume 40, Number 6 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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