However, the transmission of crude oil price movements does not stop there: oil is used in the production of many goods and services, like chemicals or air transport. It therefore indirectly affects non-energy inflation. In addition to the direct and indirect effects, a third channel may affect inflation: that of "second round" effects leading to an increase in wages via indexation mechanisms (e.g. the minimum wage in France) or via wage bargaining, which feeds back into inflation. This article focuses on the direct and indirect effects of oil price changes, but does not take account of second round effects that occur with a lag.
Assessing the indirect impact of oil prices on inflation
We base this assessment on two simple ideas. First, France and the euro area mainly use imported oil. In 2016, net oil imports stood at 3,200 million barrel of oil equivalent in the euro area and 550 million in France.
Second, the demand for oil is not very sensitive to its short-term price. A EUR 10 change in the price of a barrel of oil therefore mechanically results in a proportional increase in the oil bill, of EUR 32 billion in the euro area, or 0.6% of household consumer spending, and of EUR 5.5 billion in France, or 0.5% of consumer spending.
This increase thus corresponds to the total−direct and indirect−impact on final demand prices, before taking account of any second round effects from the response of wages to the rise in inflation. Based on national accounts input-output tables, we estimate the energy import content of the different items of demand. We find that household consumption accounts for around 60% of the end use of net oil imports in both the euro area and in France, while the remainder is mainly incorporated in the production of exported goods. We then add the oil already contained in imported manufactured goods which also ends up in domestic consumption. By assuming that the production structure of these imported goods is similar to that of the goods produced in the euro area and in France, we calculate that the total oil content of consumption is 65% of the oil bill in the euro area and 73% in France. As Table 1 shows, a EUR 10 rise in the price of a barrel of oil therefore results in a total impact of 0.4 percentage point on the HICP in the euro area, of which 0.3 percentage point is direct and 0.1% is indirect. In France, the total impact is also 0.4 percentage point, of which 0.25 is direct and 0.15 is indirect.