Page 18 - Invited Paper Session (IPS) - Volume 2

IPS178 Sana Antoine S. J.

Figure 2: Headline versus Core CPI (year on year change) Sources: CAS, BDL

Based on figure 2, we can notice that headline CPI is more influenced by
oil prices and, consequently, more volatile than core CPI. For instance, the
jump in prices which happened in 2009 is essentially due to the Brent price
increase. As expected, the core CPI is slightly less impacted by the shock on
oil prices and stands below headline CPI during the period 2009-2011. The
opposite happened in 2014, when Brent prices dropped drastically: the drop
of core CPI is smaller than the one of headline CPI.
Nevertheless, we also notice that core CPI is only a partial improvement
to headline CPI since the effects of oil prices are still clearly seen in the graph.
Actually, this approach relies on the fact that components are classified into
two clear separate groups: those impacted by domestic monetary measures
and those exclusively influenced by external factors. Unfortunately, this
assumption does not hold for many reasons:
 Some items are impacted by external and internal factors. For instance,
transportation prices are clearly impacted by the world price of oil as
well as by the level of wages in Lebanon (bus driver, mechanic).
 Cost of imports can be transmitted to all items through indirect or
second-round effects. For instance, an increase in the price of imported
capital machinery and raw materials affect indirectly all industry-
related items of CPI.
b- Model-based approach
In order to overcome the previous limitations, a regression model is
proposed to estimate the importance of imported inflation in the total
headline inflation in Lebanon. This model does not make any distinction
between sectors but explains the variations in CPI using variables which
describe both domestic and external economic environment.
The main external variables impacting consumer prices are:
 Brent price (US Energy Information Administration)
 Agricultural Index (World Bank)

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