Oil price showed sharp fluctuations in recent years which revived the interest in its effect on inflation. In this paper, we discuss the relationship between oil price and inflation in Spain, at national and regional levels, and making the distinction between energy and non-energy inflation. To this end, we fit econometric models to measure the effect of oil price shocks on inflation and to predict them under different scenarios. Our results show that almost half of the volatility of changes in total inflation is explained by changes in oil price. As could be expected, the energy component of inflation drives this effect. We also find that, under the most likely scenarios, 1-year ahead total inflation will be moderate, with relevant differences across regions.
Keywords: Deflation; Forecasting; Inflation; Oil price; Simulation.
© The Author(s) 2020.