Oil price pass-through to consumer prices and the inflationary environment: a STAR approach

ABSTRACT

Previous studies on the effects of oil price changes indicate that oil price pass-through to inflation has decreased in the United States since the Great Moderation. This paper investigates why oil price pass-through has decreased from the viewpoint of an inflationary environment. By estimating a smooth transition autoregressive model that considers past US inflation rates, I show that oil price pass-through is low in a low-inflation environment. This result suggests that the inflationary environment is important in explaining the declining oil price pass-through in the United States.

KEYWORDS:

• Oil prices
• pass-through
• inflation
• smooth transition autoregressive models

JEL CLASSIFICATION:

• E31
• E37
• Q43

Acknowledgments

I am grateful to Hajime Tomura, Kozo Ueda, Munechika Katayama, Junko Koeda, Masato Shizume, Mitsuki Oikawa, Hisaki Kono, Shinichi Nishiyama, and Naoto Jinji for their helpful comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ For a robustness check, following Blanchard and Galí (2010), I included two more variables into the baseline model: percent changes in wages and employment. My result is robust even if these variables were included.

² When the selected $\delta$ is less than 0.1, it is rechosen so that the SSR is the next smallest because estimates of the coefficients in the model with very small $\delta$ are extraordinarily large.

³ For a robustness check, I used US crude oil composite acquisition cost by refiners for the estimation. My result is robust even if I used the oil prices instead of WTI oil prices.

⁴ The period for the estimation ranges from 1975:Q2–2015:Q4 because the maximum $d$ is four. Therefore, oil price pass-through is estimated from 1976:Q2–2015:Q4.

⁵ The parameters $d$ and $\delta$ were chosen and estimated to be 4 and 1.984, respectively.

⁶ I conducted the significance test for a difference between the coefficients on the high- and low-inflation regimes. The p-value is 0.1011, thus implying slight evidence that the two coefficients are different.

⁷ This value indicates that a 100% increase in oil prices increases the CPI by 2.68%.

Additional information

Funding

This work was supported by Japan Society for the Promotion of Science Grants-in-Aid for Scientific Research under Grant [numbers 16H07281, 17K13763]; and Waseda University Grant for Special Research Projects under Grant [numbers 2016S-003, 2017K-013, 2018K-013].