Decomposed Oil-Driven Inflation Persistence and Asymmetric Shocks

Abstract This paper proposes a framework for measuring inflation persistence using error- and intrinsic-based measures. We decompose the oil price into returns, cyclical components, permanent trends and innovations to estimate their distinct impacts on inflation persistence. The results reveal that oil returns and cyclical oil price components reduce inflation persistence in net-exporting oil economies but significantly increase it in net-importing oil economies. The permanent oil prices reduce the intrinsic-based persistence in the US, Germany, Canada, India, Brazil and Korea. Applying a regime-switching local projection, we identify asymmetric oil price impact on inflation persistence through the transmission channel of extreme oil price shock, exchange rate movements and intensity of geopolitical risk. Notably, in extreme geopolitical risks, inflation persistence significantly decreases in reaction to oil shocks in net-importing oil economies. These results show the need to address specific oil price components to manage inflation effectively and support central banks with more effective monetary policy measures that address oil-driven inflation.