Energy Expenditures and CPI Inflation in 2022: Inflation Was Even Higher Than We Thought

Huw Dixon and Aftab Chowdhury

No 550, National Institute of Economic and Social Research (NIESR) Discussion Papers from National Institute of Economic and Social Research

Abstract: This study finds a downward bias in the official CPI inflation figure from the second quarter to the end of 2022 due to the sudden changes in household energy expenditure. The energy price (specifically, oil price) started increasing from the last quarter of 2021 due to the rebound of economic activity and the supply-side issues after the Covid-19 pandemic, as well as the declining investment in oil and gas production after 2014. However, the sudden increase in the energy price in the second quarter of 2022 is simply derived from the Russia-Ukraine conflict that began on 24 February 2022. The sudden rise in the energy price and its inelastic nature has generated significant changes in household expenditure for energy (specifically in COICOP 04 Housing, water, electricity, gas, and other fuels and the COICOP 07 transport). These produce a significant downward bias in the official CPI inflation rate in COICOP 04 and 07, hence in the official CPI inflation rate for all items. Moreover, the input-output matrix of the national accounts helps us find the intermediate use of energy and its impact in other COICOP divisions which are not directly related to energy, such as COIOP 02 Alcoholic Beverages and Tobacco, COICOP 05 manufacture of Furniture, and COICOP 06 Health. All those together have caused the downward bias in the official CPI inflation rate in 2022.

Keywords: CPI; inflation; energy economics (search for similar items in EconPapers)
JEL-codes: C43 C67 D10 E01 E31 Q41 (search for similar items in EconPapers)
Date: 2023-07
New Economics Papers: this item is included in nep-cis, nep-ene and nep-mon
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