Understanding the Global Drivers of Inflation : How Important Are Oil Prices ?

This paper examines the global drivers of inflation in 55 countries over 1970–2022. Thepaper estimates a Factor-Augmented Vector Autoregression model for each country and assess the importance of several global (demand, supply, and oil price) and domestic shocks.It reports three main results. First, global shocks have explained about 26 percent of inflation variation in atypical economy. Oil price shocks accounted for only about 4 percent of inflation variation, but they had a statisticallysignificant impact on inflation in three-quarters of the countries. Second, global shocks have become more importantin driving inflation variation over time. The share of inflation variance caused by oil price shocks increased from4 percent prior to 2000 to roughly 9 percent during 2001–22. They also accounted for some of the steep runup in inflationbetween mid-2021 and mid-2022. Third, oil price shocks tended to contribute significantly more to inflationvariation in advanced economies, countries with stronger global trade and financial linkages, commodity importers,net energy importers, countries without inflation-targeting regimes, and countries with pegged exchange rate regimes.The headline results are robust to a wide range of exercises—including alternative measures of global factorsand oil prices—and aggregation of countries.