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Fuelling Future Prices: Oil Price and Global Inflation

Listed author(s):
  • Carlos Medel

Several years ago, the entire world experienced how fast and damaging certain inflationary shocks can be transmitted across seemingly uncorrelated countries. Despite the analysis of fuzzy transmission mechanisms, a direct inflationary transmission channel through global commodity prices shocks has been always of interest to policymakers—especially those concerned on imported inflation. The majority of international-to-domestic pass-through price measures are obviously insample estimations. However, in this article I analyse to what extent either global inflation or the Brent oil price provides more valuable information for future domestic inflation rates. I compare ten different multihorizon forecasts coming from a family of univariate time-series models for 53 countries. Each of these ten models is augmented with an exogenous variable—either and ad-hoc global inflation factor or Brent oil price. Overall, in almost 90% of the countries the use of any of these two variables improves the forecasting accuracy compared to the case without any exogenous factor. In 74 and 60% of the countries the global-inflation-based forecast outperforms oil-based forecast at 1- and 12-months-ahead. Twenty-four-months ahead the oil-based-forecast outperforms in 62% of the countries. Major predictive gains are observed for European OECD and Caribbean countries.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 770.

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Date of creation: Sep 2015
Handle: RePEc:chb:bcchwp:770
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  1. Friedrich, Christian, 2016. "Global inflation dynamics in the post-crisis period: What explains the puzzles?," Economics Letters, Elsevier, vol. 142(C), pages 31-34.
  2. Gao, Liping & Kim, Hyeongwoo & Saba, Richard, 2013. "How Does the Oil Price Shock Affect Consumers?," MPRA Paper 49565, University Library of Munich, Germany.
  3. Gao, Liping & Kim, Hyeongwoo & Saba, Richard, 2014. "How do oil price shocks affect consumer prices?," Energy Economics, Elsevier, vol. 45(C), pages 313-323.
  4. Chen, Shiu-Sheng, 2009. "Oil price pass-through into inflation," Energy Economics, Elsevier, vol. 31(1), pages 126-133, January.
  5. Edelstein, Paul & Kilian, Lutz, 2009. "How sensitive are consumer expenditures to retail energy prices?," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 766-779, September.
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