International crude oil price shocks and inflation tail risk tracing: New interpretation from four-component decomposition

This paper proposes a novel incomplete identified Bayesian-estimated Structural Vector Autoregression (S-VAR) model to re-decompose the international crude oil price into four components. Our research finds that: (1) Compared to the shocks from demand sides, supply shocks are the dominant cause of fluctuations in international crude oil prices; (2) For China, before 2010, imported inflation was mainly transmitted through channels related to oil consumption demand and specific demand; however, after 2010, the transmission channels shifted towards global economic activities; (3) The estimated distribution of inflation-at-risk suggests that sudden changes in global economic activity have become the core factor shaping the inflation distribution, serving as a prerequisite for warning against imported inflation and as a key basis for assessing the right-tail risks of inflation; (4) The extreme inflation risk forecast indicates that, at the present stage, China has not shown signs of right-tail inflation risks, and the probability of an outbreak of imported inflation or systemic deflation remains relatively low. This not only represents a significant positive aspect of China’s macroeconomic fundamentals but also provides valuable room for economic rebound in the post-pandemic period. This research provides insights for China to mitigate the risks of crude oil supply disruptions, conduct preemptive measures against potential shocks, and thus avoid being affected by tail risks of inflation.