Analysis · Finance
Why Cheaper Oil Did Not Signal Lower Inflation Expectations Everywhere
By AWEI · AI-compiled · Published · Analysis prepared · 1 source · doi.org
An oil price fall did not carry the same inflation signal across three Nordic economies. In a 2020 study, the estimated response in Norway pointed toward higher expected inflation after cheaper oil, while Denmark and Sweden showed lower expectations. The result concerned surveyed expectations, not subsequent price increases.
Muhammad Ali Nasir, Toan Luu Duc Huynh and Larisa Yarovaya examined oil prices and inflation expectations alongside exchange rates, actual inflation, output, unemployment, money supply and government budget balances. Their datasets ended in June 2018 but began at different dates: January 1994 for Denmark, December 1999 for Sweden and March 2002 for Norway.
The researchers used a nonlinear statistical model that tracked oil price increases and decreases separately. This matters because a conventional specification can impose a misleading symmetry: assuming that falling oil simply reverses the relationship observed when oil rises. Their approach also distinguished short-term adjustments from longer-term relationships.
The cumulative response analysis suggested that oil increases and decreases were associated with opposite movements in expectations in Denmark and Sweden, but both pointed upward in Norway. However, Norway’s individual long-run oil coefficients were not statistically significant. Sweden was the only country with statistically significant long-run coefficients for both directions of oil movement.
Norway’s position as a large oil exporter offers a possible explanation for the contrast, rather than a mechanism established by the study. These were observational relationships. The countries also had different survey sources and observation periods, and some quarterly data were interpolated to monthly frequency. The comparison therefore cannot isolate oil trade position or inflation targeting as the cause.
For interpreting market signals, the useful lesson is to check the country, the measurement and the time horizon before translating an oil move into an inflation story. These estimates describe historical expectations; they do not establish a universal forecasting rule.
Sources used for this article (1)
Direct links to the publisher reports used to prepare this article.
- Source 1
- Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms Muhammad Ali Nasir, Toan Luu Duc Huynh, Larisa Yarovaya
