The Impact of Oil Price Changes Infaction

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THE IMPACT OF OIL PRICE CHANGES

ON SPANISH AND EURO AREACONSUMER PRICE INFLATION

Documentos Ocasionales

N. 0904

Luis J. lvarez, Samuel Hurtado,Isabel Snchez and Carlos Thomas

2009


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THE IMPACT OF OIL PRICE CHANGES ON SPANISH AND EURO AREA

CONSUMER PRICE INFLATION


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THE IMPACT OF OIL PRICE CHANGES ON SPANISH AND

EURO AREA CONSUMER PRICE INFLATION(*)

Luis J. lvarez (**), Samuel Hurtado, Isabel Snchez

and Carlos ThomasBANCO DE ESPAA

(*)We are grateful to participants at a Workshop of Eurosystem and Latin American Central Banks and at a Banco

de Espaa seminar, particularly ngel Estrada, Jos Manuel Gonzlez, Mario Izquierdo, Eva Ortega and Juan

Pealosa for helpful comments and suggestions.

(**) Corresponding author: [email protected].

Documentos Ocasionales. N. 0904

2009


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The Occasional Paper Series seeks to disseminate work conducted at the Banco de Espaa, in theperformance of its functions, that may be of general interest.

The opinions and analyses in the Occasional Paper Series are the responsibility of the authors and,therefore, do not necessarily coincide with those of the Banco de Espaa or the Eurosystem.

The Banco de Espaa disseminates its main reports and most of its publications via the INTERNETat the following website: http://www.bde.es.

Reproduction for educational and non-commercial purposes is permitted provided that the source isacknowledged.

BANCO DE ESPAA, Madrid, 2009

ISSN: 1696-2222 (print)

ISSN: 1696-2230 (on line)Depsito legal: M. 42145-2009Unidad de Publicaciones, Banco de Espaa


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Abstract

This paper assesses the impact of oil price changes on Spanish and euro area consumer

price inflation. We find, consistently with recent international evidence, that the inflationary

effect of oil price changes is limited, even though crude oil price fluctuations are a major

driver of inflation variability. The impact on Spanish inflation is found to be somewhat higher

than in the euro area. Direct effects are increasing over time, reflecting the higher spending

of households on refined oil products, whereas indirect ones, defined in broad terms, are

losing importance.

Keywords: oil prices, consumer price inflation, Spanish and Euro area inflation, DSGE

models.

JEL classification: E20, E31, E37.


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BANCO DE ESPAA 9 DOCUMENTO OCASIONAL N. 0904


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CONSUMER PRICE INFLATION. CONTRIBUTION OF ENERGY

Sources: INE, Eurostat and Banco de Espaa.

-1

0

1

2

3

4

5

1996 1998 2000 2002 2004 2006 2008

ENERGY (pp)

NON-ENERGY (pp)

INFLATION (%) (HICP)

SPAIN

-1

0

1

2

3

4

5

1996 1998 2000 2002 2004 2006 2008

ENERGY (pp)

NON-ENERGY (pp)

INFLATION (%) (HICP)

EMU

CONTRIBUTIONS TO INFLATIONSpain EMU Germany France Italy

ENERGY

Average 1996-2008 0.4 0.4 0.5 0.3 0.3

Maximum year 1.2 1.1 1.2 1.0 0.9

Minimum year -0.3 -0.2 -0.3 -0.2 -0.2

OIL REFINED PRODUCTS (a)

Average 1996-2008 0.3 0.2 0.2 0.2 0.1

Maximum year 0.9 0.7 0.8 0.8 0.5

Minimum year -0.1 -0.2 -0.2 -0.3 -0.1

Sources: Eurostat and Banco de Espaa

(a) Liquid fuels and fuels and lubricants for personal transport equipment.


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Spain EU 14 (a) Germany France Italy

PETROL

Retail price 100.0 100.0 100.0 100.0 100.0

Taxes 52.6 63.1 65.0 63.7 60.1

Price without taxes 47.4 36.9 35.0 36.3 39.9

DIESEL OIL

Retail price 100.0 100.0 100.0 100.0 100.0

Taxes 45.9 55.7 56.5 55.4 52.8

Price without taxes 54.1 44.3 43.5 44.6 47.2

Source: European Commission.

(a) EU14: EU15 excluding Spain.

RETAIL PRICES AND TAXES


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(1) Total effect after 2 months, except for gas.

(2) Traditional macro model (MTBE).

2.93 2.77

4.955.22

2.692.25

2.001.77

0.21 0.20 0.17

0

1

2

3

4

5

6

SPAIN EMU SPAIN EMU SPAIN SPAIN SPAIN

(2)

EMU SPAIN SPAIN

(2)

EMU

DIRECT IMPACT OF A 10% INCREASE IN THE OIL PRICE (1)

TRANSPORT

FUELS HEATING OIL GAS ENERGY HICP

Spain

Residual standard error= 1.43% R= 0.67



43$

613$

6)7.7(

))(/)(/())(/)((20.0 ttttttt ErmmPcrudemmErmmPcrudemmgasNaturalP

5323)8.8(

))(/())((37.0tan

ttttt PcrudemmPcrudemmgaseBuP

1)2.9()8.10(

13.016.0 ttt PcrudePcrudefuelstransportHICP

1)2.9()0.8(

27.023.0 ttt PcrudePcrudeoilheatingHICP


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EMU



Definition of variables:

Pcrude: Price of crude oil (North Sea Brent) in eurosEr: euro dollar exchange ratePcrude$t : Price of crude oil in dollars

mm i : moving aerage of order i

1)3.8(

t)7.10(

t Pcrude12.0Pcrude16.0fuelstransportHICP t

1-t)0.5(

t)9.10(

t Pcrude16.0Pcrude36.0oilheatingHICP


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Price increases Mean scores (1) p-value (2)

% Relevant

factor (3)

A change in the cost of raw materials 3.12 0.00 72.6%

A change in labour costs 2.72 0.00 56.8%

A change in competitors prices 2.54 0.00 52.1%

A change in demand 2.36 0.00 43.5%

A change in energy and fuel prices 2.20 0.00 35.3%

A change in other production costs 2.10 0.89 32.0%

An improvement in design, quality or the product range 2.09 0.00 34.0%

A change in productivity 1.91 0.00 27.3%

A change in financial costs 1.77 -- 19.4%

Price decreasesMean scores (1) p-value (2)

% Relevant

factor (3)

A change in competitors prices 2.66 0.08 57.2%

A change in the cost of raw materials 2.54 0.00 51.7%

A change in demand 2.43 0.00 48.1%

The intention of gaining market share 2.20 0.00 40.1%

A change in labour costs 1.96 0.00 29.3%

A change in productivity 1.85 0.01 25.9%

A change in energy and fuel prices 1.83 1.00 23.1%

A change in other production costs 1.83 0.00 23.5%

A change in financial costs 1.55 -- 13.4%

(3) % important denotes the fraction of firms rating the factor as important or very important.

(2) The p-value in columns 2 refers to the null hypothesis that the factor's mean scores (reported in colum 1) is

Driving factors of price increases and decreases

(1) Respondents are asked in question C1 to indicate the importance of each factor, the alternative scores being: (1)

unimportant, (2) of minor im portance,(3) important, (4) very important.


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COST STRUCTURE (%)

OIL AND FUELS

COSTS

OTHER ENERGY

COSTS

OTHER

INTERMEDIATE

CONSUMPTION

COSTS

COMPENSATION

PER EMPLOYEETOTAL

Total economy 3.4 2.0 61.4 33.2 100

Energy 21.1 18.5 45.3 15.1 100

Industry 5.7 1.9 73.8 18.6 100

Services 1.3 1.3 54.0 43.4 100

Total economy 2.9 1.6 59.3 36.2 100

Energy 13.9 20.2 44.0 21.9 100Industry 5.2 1.6 71.7 21.5 100

Services 1.2 0.9 50.9 47.0 100

SPAIN

EMU (a)

COST STRUCTURE OF DIFFERENT INDUSTRIES. INPUT OUTPUT TABLE, BASIC PRICES. YEAR 2005

SOURCE: Eurostat.

a. EMU: Germany, France and Spain.


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OIL PRICE INCREASES AND INFLATION

ADJUSTMENT CLAUSES (a)

SOURCE: Banco de Espaa.

a. Annual figures: 1991-2008

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

-40 -20 0 20 40 60

pp

OIL PRICE INCREASE

SIZEOFINFLATION

ADJUSTMENT

C

LAUSES

%


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EXPERT SURVEY FIRM SURVEY

PERCENTAGE OF

WORKERS COVERED

BY WAGE

INDEXATIONS

CLAUSES

TOTALAUTOMATIC LINK

TO PAST INFLATION

AUTOMATIC LINK TO

EXPECTED INFLATION

NO FORMAL RULE.

PAST INFLATION

TAKEN INTO

ACCOUNT

NO FORMAL RULE.

EXPECTED INFLATION

TAKEN INTO

ACCOUNT

Spain >75% 70 38 16 11 5

Euro area 31 13 4 6 7

Germany None 27 na na na na

France


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Efects rom a 10% rise in the price o oil according to MTBE

Accumulatedpercentagediferencesrom basescenario

1. PRICES AND COSTS

Harmonized index o consumer prices (HICP) 0.25 0.38 0.33 0.23 0.28 0.20

Non-energy component o HICP 0.07 0.25 0.22 0.05 0.15 0.09

Energy-component o HICP 1.79 1.59 1.33 1.77 1.53 1.27

GDP deator 0.16 0.18 0.03 0.10 0.05 -0.08

Private consumption deator 0.29 0.23 0.03 0.22 0.11 -0.04

Deator o exports o goods and services 0.06 0.12 0.00 0.04 0.05 -0.04

Deator o imports o goods and services 0.91 0.83 0.63 0.89 0.79 0.61

Unit labour costs 0.09 0.25 0.08 0.00 0.10 -0.03

Compensation per employee 0.08 0.17 0.16 0.00 0.01 0.03

2. ACTIVITY (constant prices)

GDP 0.01 -0.21 -0.27 0.01 -0.21 -0.27

Private consumption -0.04 -0.09 -0.18 -0.04 -0.09 -0.20

Public consumption 0.00 0.00 0.00 0.00 0.00 0.00

Gross xed capital ormation 0.06 -0.11 -0.39 0.04 -0.21 -0.47

Exports o goods and services -0.01 -0.09 -0.06 -0.01 -0.05 -0.01

Imports o goods and services -0.06 0.12 -0.07 -0.08 0.08 -0.08

Contributions to growth o real GDP

National demand (diference in levels) 0.00 -0.08 -0.21 -0.01 -0.11 -0.24

Net exports (diference in levels) 0.02 -0.05 0.01 0.03 -0.03 0.03

3. OTHER VARIABLES

Unemployment rate (diference in levels) -0.01 0.08 0.20 -0.01 0.07 0.19

Employment 0.02 -0.12 -0.35 0.02 -0.11 -0.34

Real disposable income -0.17 -0.24 -0.19 -0.15 -0.25 -0.24

exogenous wagesendogenous wages

year

2

year

3

year

1

year

2

year

3

year

1


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Effects from a 10% rise in the price of oil with endogenous and exogenous wages

HICP energy HICP non-energy HICP

GDP deflator Private consumption deflator Imports deflator

GDP Employment Private sector wages

baseli ne s imu la ti on (endogenous wages) exogenous wages

0,0

0,1

0,2

0,3

0,4

0,5

-0,2

-0,1

0,0

0,1

0,2

0,3

-0,4

-0,3

-0,2

-0,1

0,0

0,1

0,0

0,5

1,0

1,5

2,0

-0,1

0,0

0,1

0,2

0,3

0,4

-0,5

-0,4

-0,3

-0,2

-0,1

0,0

0,1

-0,1

0,0

0,1

0,2

0,3

0,0

0,2

0,4

0,6

0,8

1,0

1,2

-0,1

0,0

0,1

0,2

0,3


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Impact o a 10% rise in the international price o oil

Year 1 Year 2 Year 1 Year 2

22.0-10.031.052.0)1(tceelatoT

00.000.000.002.0)2(tceetceriD22.0-10.050.030.0)3(tceetceridnI

Second-round efect (4) 0.02 0.07 0.00 0.00

Euro area total efect (5) 0.06 to 0.32 0.02 to 0.22 -0.02 to -0.16 -0.06 to 0.04

Ination GDP (rate o growth)

(1) Results from baseline simulation with MTBE.

(2) Coefficients in equations, and weight of energy in total HICP.

(3) Results from simulation with exogenous wages, minus (2).

(4) Results from baseline simulation minus (2) minus (3).

(5) Results for the euro area from other large-scale macroeconomic models (ECB AWM, EC QUEST, NiGEM, OECD Interlink, IMF Multimod)


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0 5 10 15 200

0.05

0.1

0.15

0.2GDP deflator

Spain

rest of EMU

0 5 10 15 200

0.1

0.2

0.3

0.4HICP

0 5 10 15 200.02

0.04

0.06

0.08

0.1nominal interest rate

0 5 10 15 20-0.02

0

0.02

0.04

0.06real interest rate

0 5 10 15 20-0.3

-0.2

-0.1

0

0.1private consumption

0 5 10 15 20-1

-0.5

0

0.5private investment

0 5 10 15 20-0.3

-0.2

-0.1

0

0.1GDP

0 5 10 15 20-0.2

-0.1

0

0.1

0.2employment

0 5 10 15 20-0.1

-0.05

0

0.05

0.1nominal wages


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0 5 10 15 200

0.05

0.1

0.15

0.2GDP deflator

baseline model

no wage indexation

0 5 10 15 200

0.1

0.2

0.3

0.4HICP

0 5 10 15 200.02

0.04

0.06

0.08


0 5 10 15 20-0.02

0

0.02


0 5 10 15 20-0.3

-0.2

-0.1

0


0 5 10 15 20-1

-0.5

0


0 5 10 15 20-0.3

-0.2

-0.1

0

0.1GDP

0 5 10 15 20-0.2

-0.1

0

0.1

0.2employment

0 5 10 15 20-0.1

-0.05

0

0.05

0.1nominal wages


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0 5 10 15 20-0.1

0

0.1

0.2

0.3non-energy CPI

baseline model

core inflation targeting

0 5 10 15 20-0.1

0

0.1

0.2

0.3HICP

0 5 10 15 20-0.05

0

0.05

0.1


0 5 10 15 20-0.1

-0.05

0

0.05


0 5 10 15 20-0.3

-0.2

-0.1

0


0 5 10 15 20-1

-0.5

0


0 5 10 15 20-0.3

-0.2

-0.1

0

0.1GDP

0 5 10 15 20-0.2

-0.1

0

0.1

0.2employment

0 5 10 15 20-0.1

-0.05

0

0.05

0.1nominal wages


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The Impact of Oil Price Changes Infaction

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