Predicting inflation rates with changing oil prices

Description

"This paper estimates the effect of higher crude-oil prices on the inflation rate in the U.S. It does so by estimating a price equation, within a model of wage-price interaction, that contains a term to capture the inflationary impact of crude oil prices. This term is inserted using a third degree polynomial distributed lag of four quarters that allows not only for some immediate impact on the consumer price index (e.g. through gasoline prices), but also for a delayed impact as crude oil prices affect production costs, wage rates, and eventually final goods prices. Since increase in crude oil prices appear to be a continuing source of exogenous shocks on the system, simulations are presented that estimate the net effect of these increases; in this case of the 14.5% increase announced by OPEC for 1979 on the remaining quarters in 1979 and 1980. If OPEC policies, Iranian developments, or domestic U.S. policies should raise crude oil prices by an additional 10%, the net effect is estimated to raise the inflation rate by 0.9% above what it would otherwise be."

Subjects

Series Statement

• Faculty working papers -- no. 545

Other Editions

• Predicting inflation rates with changing oil pricesCollege of Commerce and Business Administration, University of Illinois at Urbana-Champaign1979-01-01
• Predicting inflation rates with changing oil pricesCollege of Commerce and Business Administration, University of Illinois at Urbana-Champaign1979