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Why has Core Inflation Remained so Muted in the Face of the Oil Shock?

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  • Paul van den Noord
  • Christophe André

Abstract

To help policymakers form a judgment on inflation risks and the required monetary policy stance the OECD has developed an analytical framework based on a set of 'eclectic' Phillips curves estimated for the two largest OECD economies, the United States and the euro area, which is presented in this paper. This framework is used in the preparation of the Economic Outlook to explain recent developments in core inflation, excluding food and energy, based on developments in measures of economic slack (the output gap), spill-over effects from energy prices onto core inflation and lagged responses to past inflation via expectations formation. The fact that the knock-on effects from energy shocks onto core inflation appear small in comparison with the 1970s can be explained by the secular fall in energy intensity, a low and stable rate of 'mean inflation' -- to which observed inflation reverts after a shock has worked its way through -- and persistent slack in the aftermath of the bursting of the dotcom bubble. Pourquoi l?inflation sous-jacente est elle restée si modérée en dépit du choc pétrolier ? Afin d'aider les décideurs politiques à apprécier les risques inflationnistes et l'orientation requise pour la politique monétaire, l'OCDE a développé un cadre analytique fondé sur un ensemble de courbes de Phillips 'éclectiques' estimées pour les deux plus grandes économies de l'OCDE, les États-unis et la zone euro, qui est présenté dans ce document. Ce cadre est utilisé dans la préparation des Perspectives économiques pour expliquer l'évolution récente de l'inflation sous-jacente, hors alimentation et énergie, en fonction de l'évolution de mesures de la robustesse de la conjoncture (l'écart de production), des effets de contagion des prix de l'énergie sur l'inflation sous-jacente et des réponses différées à l'inflation passée à travers la formation des anticipations. Le fait que les effets d'entraînement des prix de l'énergie sur l'inflation sous-jacente apparaissent faibles comparés aux années 1970 peut s'expliquer par la baisse séculaire de l'intensité énergétique, un taux d'inflation 'moyen' faible et stable -- vers lequel l'inflation observée converge une fois qu'un choc a été absorbé -- et par une faiblesse persistante de l'économie à la suite de l'éclatement de la bulle 'dotcom'.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 551.

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Date of creation: 23 Apr 2007
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Handle: RePEc:oec:ecoaaa:551-en

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Keywords: inflation; energy; monetary policy; politique monétaire; énergie; inflation;

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Cited by:
  1. Edda Zoli, 2009. "Commodity Price Volatility, Cyclical Fluctuations, and Convergence," IMF Working Papers 09/41, International Monetary Fund.
  2. Gao, Liping & Kim, Hyeongwoo & Saba, Richard, 2014. "How Do Oil Price Shocks Affect Consumer Prices?," MPRA Paper 57259, University Library of Munich, Germany.
  3. Chen, Shiu-Sheng, 2009. "Oil price pass-through into inflation," Energy Economics, Elsevier, vol. 31(1), pages 126-133, January.
  4. Richard G. Anderson & Jane M. Binner & Vincent A. Schmidt, 2011. "Connectionist-based rules describing the pass-through of individual goods prices into trend inflation in the United States," Working Papers 2011-007, Federal Reserve Bank of St. Louis.
  5. Fulli-Lemaire, Nicolas, 2012. "Alternative Inflation Hedging Portfolio Strategies: Going Forward Under Immoderate Macroeconomics," MPRA Paper 42854, University Library of Munich, Germany.
  6. Fulli-Lemaire, Nicolas, 2012. "Allocating Commodities in Inflation Hedging Portfolios: A Core Driven Global Macro Strategy," MPRA Paper 42852, University Library of Munich, Germany, revised 15 Oct 2012.
  7. Fulli-Lemaire, Nicolas & Palidda, Ernesto, 2012. "Swapping Headline for Core Inflation: An Asset Liability Management Approach," MPRA Paper 42853, University Library of Munich, Germany, revised 16 Nov 2012.
  8. Fulli-Lemaire, Nicolas, 2013. "Alternative inflation hedging strategies for ALM," MPRA Paper 43755, University Library of Munich, Germany.

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