Do High Oil Prices Presage Inflation? The Evidence from G-5 Countries
UC Santa Cruz Economics Working Paper No. 561; SCCIE Working Paper No. 04-04
25 Pages Posted: 9 Mar 2004
Date Written: February 19, 2004
We estimate the effects of oil price changes on inflation for the United States, United Kingdom, France, Germany, and Japan using an augmented Phillips curve framework. We supplement the traditional Phillips curve approach taking into account the growing body of evidence suggesting that oil prices may have asymmetric and nonlinear effects on output and that structural instabilities may exist in those relationships. Our statistical estimates suggest current oil price increases are likely to have only a modest effect on inflation in the U.S, Japan, and Europe. Oil price increases of as much as 10 percentage points will lead to direct inflationary increases of about 0.1-0.8 percentage points in the U.S. and the E.U. Inflation in Europe, traditionally thought to be more sensitive to oil prices than in the U.S., is unlikely to show any significant difference in sensitivity from that in the United States and in fact may be less in some countries.
Keywords: inflation, Phillips curve, oil prices, exchange rates
JEL Classification: E3, C2
Suggested Citation: Suggested Citation