How Large and Persistent is the Response of Inflation to Changes in Retail Energy Prices?

IMF Working Papers, June 12, 2020

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Study estimates dynamic effects of changes in retail energy prices on inflation using a novel monthly database, covering 110 countries over 2000:M1 to 2016:M6.
Main result: inflation responds positively to retail energy price shocks, with effects being, on average, modest and transitory.
Evidence of significant heterogeneity in the response of inflation across countries driven by differences in labor market flexibility, energy intensity, and monetary policy credibility.
Compelling evidence of asymmetric effects—under sufficiently large shocks—in the case of high-income and low-income countries: increases in retail fuel prices induce larger effects on inflation than decreases in fuel prices.

Monthly dataset covering 110 countries over 2000:M1 to 2016:M6.
Analysis period and sample as stated above; methods referenced include local projections and investigation of non-linearity and asymmetries.

Cross-country heterogeneity linked to:
- Labor market flexibility.
- Energy intensity.
- Monetary policy credibility.
Asymmetric response:
- For high-income and low-income countries, sufficiently large increases in retail fuel prices have larger inflationary effects than comparable decreases.

Monetary policy and credibility can modulate the pass-through from retail energy price shocks to inflation.
Labor market flexibility and country energy intensity matter for transmission of fuel price shocks to overall inflation.
Policymakers should account for asymmetries: inflationary pressures from large fuel price increases may not be offset symmetrically by fuel price decreases.