Fuel-Price Shocks and Inflation in Latin America and the Caribbean

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Jan 2023
We estimate the impact of fuel-commodity price shocks on inflation and inflation expectations for eight Latin American countries in which monetary policy follows inflation-targeting frameworks. We use Bayesian Vector Autoregressive models (BVARs) and data from 2005 and up to 2022 to quantify these impacts. We find that the fuel-price shocks are significant in all cases and the response ranges between 0.01 and 0.04 percentage points of inflation, following a 1 p.p. shock to fuel prices. A variance decomposition exercise shows that more than 50% of the outburst in inflation that these countries experienced in 2021 and 2022 can be attributed to the shock in global fuel prices. These results are robust to changes in the specification that include additional controls, different commodity price measures, different lag structures, and alternative ordering.