How Large and Persistent is the Response of Inflation to Changes in Retail Energy Prices?

32 Pages Posted: 23 Jul 2020

See all articles by Chadi Abdallah

Chadi Abdallah

International Monetary Fund (IMF)

Kangni Kpodar

International Monetary Fund (IMF)

Date Written: June 1, 2020

Abstract

We estimate the dynamic effects of changes in retail energy prices on inflation using a novel monthly database, covering 110 countries over 2000:M1 to 2016:M6. We find that (i) inflation responds positively to retail energy price shocks, with effects being, on average, modest and transitory. However, our results suggest significant heterogeneity in the response of inflation to these shocks owing to differences in factors related to labor market flexibility, energy intensity, and monetary policy credibility. We also find compelling evidence of asymmetric effects-under sufficiently large shocks-in the case of high-income and low-income countries, with increases in retail fuel prices inducing larger effects on inflation than decreases in fuel prices.

JEL Classification: E30, E31, H23, E01, E52, G21, Q02

Suggested Citation

Abdallah, Chadi and Kpodar, Kangni, How Large and Persistent is the Response of Inflation to Changes in Retail Energy Prices? (June 1, 2020). IMF Working Paper No. 20/93, Available at SSRN: https://ssrn.com/abstract=3652511

Chadi Abdallah (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Kangni Kpodar

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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