Energy dependence and the differential pass-through of oil price shocks to inflation: evidence from 72 countries

Abstract

International oil price fluctuations are an important source of external inflation pressure, but their domestic effects vary across economies depending on exposure to imported energy costs. This study examines whether energy dependence systematically explains heterogeneous inflation responses to global oil price movements, using an unbalanced annual panel of 72 countries from 2001 to 2023. Employing dynamic two-way fixed effects models with country and year effects, we identify differential transmission via the interaction between global oil price growth and lagged energy dependence. The results show that countries with higher prior energy dependence exhibit stronger differential consumer price index (CPI) responses to the same global oil price shock. These findings remain robust to alternative inflation measures, positive oil price movements, predetermined energy exposure, exclusion of major events and dynamic panel estimation. Additional evidence supports an external cost transmission channel through import prices, though we interpret this as supportive rather than a structural causal decomposition. Overall, the findings call for incorporating energy dependence and import price pressure into inflation monitoring and risk assessment.