Oil shocks and inflation: A story of shifting vulnerabilities
SummaryChanged circumstances since past episodes mean history won’t repeat but countercyclical oil taxation could offer us a cushion
The 1970s’ oil shock triggered a worldwide bout of high inflation, but subsequent shocks were absorbed without inflation in most countries until now. Crude price shocks of equivalent size occurred in the late 70s, late 90s and over 2002-2005, but the world, including India, bore these better; reasons include openness, cheap imports, more flexible wages and less dependence on oil as well as better monetary policy. Productivity was rising and other adverse shocks were absent.