Do High Oil Prices Presage Inflation?
The Evidence from G-5 Countries
Michael LeBlanc and Menzie D. Chinn
Menzie Chinn is Professor of
Public Affairs and Economics at
the University of Wisconsin at
Madison, and a Research
Associate in the NBER’s
International Finance and
Macroeconomics program.
Previously, he taught at the
University of California at Santa
Cruz. During 2000-2001, Chinn served as senior staff economist for international
finance on the Council of Economic Advisers. He has also been a
visiting scholar at the IMF and the Federal Reserve
Board. Chinn received his AB in economics from Harvard
University, and his MA and Ph.D. from the University of
California, Berkeley.
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 United States, 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 United States and the European Union. Inflation in Europe, traditionally thought to be more sensitive to oil prices than in the United States, is unlikely to show any significant difference in sensitivity from that in the United States and in fact may be less in some countries.