The inflation-energy nexus in OPEC: A nonlinear forecasting perspective

This study examines the inflationary effects of energy price movements in OPEC economies, focusing on nonlinear and asymmetric dynamics. Using monthly data from 1980 to 2024, we employ an extended Phillips curve framework augmented with energy price variables. To address endogeneity, persistence, and heteroskedasticity, we apply the Feasible Quasi Generalized Least Squares (FQGLS) estimator developed by Westerlund and Narayan (2015). Our results indicate that energy prices contain meaningful predictive information for inflation in many OPEC countries, with oil prices displaying the most consistent forecasting relevance. However, the contribution of asymmetric energy price movements is selective rather than pervasive, improving forecast performance only in specific countries and energy price combinations. Out-of-sample forecast evaluations further confirm that energy price-based models enhance inflation forecasting accuracy, although symmetric specifications often perform equally well or better as the sample expands. These findings provide new evidence on the inflation-energy nexus and offer practical insights for policymakers in oil-exporting economies navigating inflation management under energy price volatility.