The deflationary effect of oil prices in the euro area

César Castro, Miguel Jerez and Andrés Barge-Gil

Energy Economics, 2016, vol. 56, issue C, 389-397

Abstract: The inflationary effect of oil price has been widely examined by academic literature. Nowadays, the main concern in the euro area (E.A.) is its deflationary effect. In this paper we propose a method to evaluate the effect of oil price changes on inflation as well as an indicator of inflation adjusted for the short-term effect of oil prices, which is aimed to assess the risk of deflation in real time. We illustrate the practical applications of these tools by predicting the evolution of inflation in the E.A., conditional to different scenarios of oil price deflation. Our main finding is that no deflationary scenario for oil prices results in a negative inflation rate forecast for December 2016, despite oil price variation accounting for 25% of the variance of changes in inflation.

Keywords: Inflation; Deflation; Oil price; Euro area; Forecasts (search for similar items in EconPapers)
JEL-codes: E31 E37 Q43 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:56:y:2016:i:c:p:389-397

DOI: 10.1016/j.eneco.2016.03.010

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