英文原文：Oil and inflation: between rounds
■The new drop-off in oil prices since fall 2015 should place a significant drag on inflation in 2016. As a result, inflation could be nil this year, as it was last year.
■Oil price fluctuations have a rapid and direct impact on inflation via the energy component of the consumer price index.
■This direct impact is also accompanied by indirect effects on the prices of goods and services, notably by modifying production costs for companies.
■In both cases, these first-round effects have an impact on the general level of prices, but do not have a lasting impact on inflation dynamics.
■The decline in oil prices becomes problematic for price stability when it triggers second-round effects, i.e. a lasting change in the expectations and behaviour of economic agents.
Although oil prices have picked up over the past few days, they have been fluctuating around a low level of about USD 35 a barrel, far below the prices of fall 2015, and a far cry from the recovery scenario projected at the time. In mid-November, when the ECB made its technical assumptions based on market expectations for oil prices used to prepare its December macroeconomic projections, Brent crude oil prices were expected to average USD 52.2 a barrel in 2016. At the end of January, market expectations had fallen to an average of about USD 38. Without a spectacular rebound in the weeks ahead, the new ECB projections to be presented on 10 March （based on market expectations for oil prices at mid-February） should indicate a net downward revision in the 2016 inflation forecast, which could be slashed to 0% from the December figure of 1.1%.
Direct impact of oil price fluctuations on inflation
Crude oil price fluctuations have a rapid, direct impact on inflation through the prices of energy products, which account for about 10% of the consumer price index. This component is comprised mainly of liquid fuel for transport and home heating1 . Its price depends on crude oil prices, refining and distribution margins, as well as taxes （excise duty, VAT）.
Two factors are particularly important. First, there is the preponderant weight of taxes, which account for a little more than half of the pump prices for petrol and diesel. They are largely independent of crude oil prices. The excise duty is a fixed amount per unit in volume. VAT applies to the pre-tax price of petrol plus the excise tax: in other words, part of the tax base is fixed. Second, although refining margins can vary widely, distribution margins are relatively constant, which suggest that they are fixed in absolute value terms and not as a percentage of oil prices.
The fact that fixed costs account for such a big share of pump prices results in a major characteristic: the elasticity of energy prices to oil prices increases as a function of the level of oil prices. In other words, the higher the price of oil, the higher the effects of its fluctuation on the CPI energy. The deflationary impact of a 50% decline in oil prices is not as strong when oil is trading at EUR 50 than when it is trading at EUR 100. In the first case, the share of fixed costs is comparatively higher, and the drop in crude oil prices has less of an effect on end pump prices.
In an August 2010 article 2 , the European Central Bank （ECB） estimated the elasticity of consumer prices for energy relative to crude oil prices. Elasticity was estimated at 42% when Brent crude oil was trading at EUR 100, but “only” 26% when oil was trading at EUR 40. Based on these estimates, the decline in Brent crude oil prices – which dropped from EUR 43 in mid-November to EUR 30 in late January – should result in a 0.78 point decline in energy price inflation （10%*30%*26%）.
Indirect first-round effects
In addition to these rapid, direct effects （between 3 and 5 weeks）, there are also more diffuse, indirect effects arising from changes in production costs for companies and how they are passed on to the sales prices of goods and services. These indirect effects apply to core inflation, i.e. excluding energy and food products. Naturally, the biggest impact is on energy-intensive products, such as transport services and pharmaceutical products. Yet with imports making up such a big proportion of production costs and end consumption in the eurozone, inflation of relatively low energy-intensive products can also be affected when oil price fluctuations change the sales prices of goods and services in countries exporting to the eurozone.
The size of indirect effects depends crucially on corporate behaviour with regard to margins. In this perspective, two factors must be taken into consideration. First, as the degree of competition increases, there is a stronger tendency to carry over lower oil prices to consumer prices. Second, for a given degree of competition, the cyclical position of the economy is key: during periods of sluggish demand, lower production costs are more likely to be carried over to sales prices. The ECB estimates the elasticity of core inflation to oil price at 20%3. In this case, the 30% decline in Brent crude oil prices between mid-November and late January would place downward pressure on core inflation of 0.6 points.
Yet several other factors must also be taken into account. First, the ECB went on to say that the full impact of these indirect effects is felt after three years. Second, its elasticity estimate was based on the assumption that crude oil prices were trading at USD 60-80. Like direct effects, however, these indirect effects tend not to be as strong when prices are low. Lastly, production costs depend on numerous factors, and as far as imports are concerned, they crucially depend on past fluctuations in the euro's effective exchange rate. Although the effective exchange rate has appreciated by about 5% since mid- November, it has declined sharply over the past year. Recent inflation trends for industrial goods and services suggest that the sluggishness of core inflation is due more to Europe’s depressed economic situation rather than to external factors （see chart 2）.
Indirect second-round effects
In principle, first-round effects - whether direct or indirect - have an impact on the general level of prices but do not have a lasting impact on inflation dynamics. Even if they don't rebound, oil prices will sooner or later stop dragging down inflation.
Consequently, the decline in inflation attributed to lower oil prices is not, in itself, a big cause for concern for the ECB as its mandate is focused on medium-term inflation prospects. From this perspective, by boosting household purchasing power and consumer spending, the decline in oil prices is a positive development.
The decline in oil prices becomes problematic for price stability when it triggers second-round effects, i.e. a lasting change in the expectations and behaviour of economic agents. Lower inflation expectations strain wage formation which in turn pulls down expectations, creating a vicious circle that could lead to deflation.
In a speech before European parliament members this week4, Mario Draghi stated that "while the most recent wave of disinflation is mainly due to the renewed sharp fall in oil prices, weaker than anticipated growth in wages together with declining inflation expectations call for careful analysis of the channels by which surprises to realised inflation may influence future price and wage-setting in our economy". This analysis will be published in March, 10th when the ECB presents its new macroeconomic outlook.
Whether or not second-round effects materialise depends on the conditions under which the shock occurs. The ECB points out two key factors: the economy's cyclical position and the central bank's credibility. Clearly, a deflationary shock would not have the same impact on medium-term price dynamics if inflation was closer to 2% and expectations were well anchored, than in the current situation, with inflation nearing 0% and expectations in decline. Moreover, at a time when the ECB has not met its inflation target for nearly three years, it also faces the challenge of maintaining credibility.
In a very insightful speech made in April 2014, Mr. Draghi carefully spelled out the ECB's reaction function. In particular, he stated that faced with a decline in medium-term inflation expectations resulting from a substantial supply-side shock at a time of low inflation, the appropriate response would be for the ECB to strengthen its quantitative easing programme. Now that Mr. Draghi has raised the possibility of a further easing of monetary policy in March, the opportunity seems ripe for increasing QE. It would allow the Eurozone to fully benefit from falling oil prices and their positive effects on medium-term inflation.