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

Posted: 1 Jun 2010

See all articles by Paul Joseph Van Den Noord

Paul Joseph Van Den Noord

affiliation not provided to SSRN

Christophe Andre

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Date Written: April 23, 2007

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.

Keywords: inflation, monetary policy, energy

JEL Classification: E31, E52, Q4

Suggested Citation

Van Den Noord, Paul Joseph and Andre, Christophe, Why Has Core Inflation Remained so Muted in the Face of the Oil Shock? (April 23, 2007). Available at SSRN: https://ssrn.com/abstract=1618189

Paul Joseph Van Den Noord

affiliation not provided to SSRN ( email )

Christophe Andre (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

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