The Effects of Energy Carrier Prices on Disaggregated Inflation in the Industry and Food Sectors Using the Quantile Model

Abstract

The persistently high inflation rate in Iran’s economy, particularly over the past decade, and the government’s inability to control it, have led to inflation being recognized as one of the main issues and challenges of Iran’s economy. There is extensive debate regarding the costs of inflation. Many economists consider low but positive inflation as necessary for economic growth; however, high inflation can impose significant costs on economic growth, primarily through the reduction of investment. Investment takes place when there is a clear and positive outlook for profitability. High inflation, which signals market instability, darkens this outlook and increases uncertainty and investment risk. Nevertheless, as long as inflation remains predictable—that is, at its long-term equilibrium level—this effect is partially mitigated. This article investigates the effects of energy carrier prices on disaggregated inflation in the industry and food sectors using the quantile model. The statistical population of this study is Iran, and given the availability of data, quarterly information from 2004 to 2023 was analyzed using EViews software and the quantile econometric technique. As the results and quantile model estimates show, in the first, second, and third quantiles, energy carrier prices (fuel oil and diesel prices) have a positive and significant effect on inflation, and this effect intensifies in the fourth quantile. In other words, the studied indices in the first (Q25), second (Q50), and third (Q75) quantiles exhibit a positive temporal correlation with inflation in the industry sector. As the lag components diminish and the movement shifts toward the fourth quantile (Q95), the correlation between the studied indices and inflation in the industry sector increases. Furthermore, the results and quantile model estimates in the food sector show that in the lower first and second quantiles, energy carrier prices (fuel oil and diesel prices) have a positive and significant effect on inflation, and from the third and fourth quantiles onward, the intensity of this effect increases. In other words, the studied indices in the first (Q25) and second (Q50) quantiles exhibit a positive temporal correlation with inflation in the food sector. As the lag components diminish and the movement shifts toward the third (Q75) and fourth (Q95) quantiles, the correlation between the studied indices and inflation in the food sector increases.