Oil price shocks in the age of surging inflation

This study examines the nonlinear impact of oil price shocks on inflation in the euro area. We apply nonlinear vector time series models to identify regime shifts in recent times of geopolitical uncertainty. For the period from January 1999 to October 2022, we reveal the influence of geopolitical risks on exacerbating the inflationary impact of oil price shocks. Our impulse response analysis indicates that oil passthrough is more pronounced and persistent when the risks associated with adverse geopolitical events surpasses a given threshold. Eurozone inflation is found to be more vulnerable to geopolitical conflicts compared with the US economy. Our results underscore the nonlinear dynamic of oil price passthrough and the amplifying effect of geopolitical events that European policymakers should consider when addressing growing inflationary pressure.