The asymmetry effect of oil price changes on inflation, and the welfare implication for Ghana

Abstract

PurposeHigh inflation levels remain a challenge in macroeconomic stabilization policies among developing economies. Oil price is identified as an important driver of inflation. In the wake of high and unstable international oil prices, the question regarding the relationship between inflation and crude oil prices, and its implication for economic welfare has become a fundamental empirical issue.Design/methodology/approachThis question is explored by estimating a non-linear autoregressive distribution lags (NARDL) model of inflation-oil nexus that examined the asymmetric response of inflation to oil price changes. The study then derived the welfare implication of the asymmetric responses, with implications for the petroleum pricing regime in Ghana.FindingsThe study found that inflation responds asymmetrically to oil prices in the long-run but not in the short-run. The welfare cost associated with the asymmetric response increases with increasing rate.Practical implicationsThe findings of this study have some implications for petroleum product pricing in Ghana. Recently, Ghana has moved from regulating petroleum prices to the automatic adjustment system. By this policy, petroleum prices change in tandem with the crude oil prices and exchange rates on the international market. Whiles this policy might be comparatively efficient, the evidence of asymmetric response of inflation to changes in oil prices raises some issues about the welfare effect of the policy.Originality/valueThe paper contributes to the literature on the inflation-oil price nexus by investigating critical questions that remain puzzling. These questions include; Does inflation respond asymmetrically to the positive and negative shock of equal magnitude in oil prices? Does inflation response to the asymmetry changes in oil prices have any implications for the welfare of the country? Is the effect of oil price changes pernicious?

Asymmetric Effects of World Energy Prices on Inflation in Indonesia

“…The results of this study provide empirical evidence that there are asymmetrical effects on the movement of world energy prices, especially crude oil, when they rise and fall on CPI inflation in Indonesia. The finding of an asymmetrically positive effect of oil prices on inflation confirms the results of research by Donayre and Wilmot (2016), Bala and Chin (2018), Sek (2019), Bawa et al (2020), Babuga and Naseem (2021), Ayisi (2021), Sarmah andBal (2021), andNie (2023). Specifically, however, these findings differ from those by Babuga and Naseem (2021) and Nie (2023), that increases in oil prices have a more significant effect on inflation than decreases.…”

“…Meanwhile, there is no evidence of the effect of changes in the exchange rate on changes in the CPI in the short run. Empirical studies related to the asymmetric effect of world oil prices on inflation only found evidence for long-run effects but not for short-run effects, in line with findings by Ayisi (2021). In general, the behavior of changes in energy prices and exchange rates tends to fluctuate so that it does not affect inflation according to theoretical expectations.…”

“…Domestic adjustments within the inflation targeting framework are needed in response to world commodity price fluctuations. Ayisi (2021) states that domestic inflation asymmetrically responds to world crude oil price changes. Due to this asymmetric effect, welfare costs increase with the inflation rate.…”

“…Today, energy issues are increasingly studied intensively and broadly with various interdisciplinary sciences. Energy issues have been extensively studied, starting from aspects of energy utilization that have an impact on economic growth (e.g., Mahalik and Mallick, 2014;Sek, 2017;and Purnomo et al, 2023) and environmental degradation (e.g., Zakari et al, 2021;Supriyanto et al, 2022;and Yuliadi and Wardani, 2023) and to what extent energy prices impact energy consumption (e.g., Chen, et al, 2016;Valizadeh et al, 2018;and Guan et al, 2023) and changes of domestic prices (e.g., Ayisi, 2021;Rizvi and Sahminan, 2020;and Kecek, 2023). One of the interesting issues related to the study of energy prices is their relation to monetary issues, mainly changes in domestic prices and inflation.…”

Understanding Global Commodity Price Shocks on Exchange Rates and Inflation in Emerging Economies: ARDL Perspective

“…The motivation for studying the influence of global commodity prices on inflation in a developing country like Ghana stems from the need to understand the factors driving inflation and exchange rates in the country. Although several studies have shown that commodity, prices, such as oil, cocoa, and petroleum products, can have a significant impact on inflation [17][18], this present study seeks to study both the influence on inflation and exchange rates interactions. In Ghana, fluctuations in these commodity prices can lead to changes in the overall price level, affecting the cost of living for the population.…”