In the United States, energy commodities represent 3.5% of the CPI, while total energy is weighted with 7.1%. Traditionally, changes in oil prices fed through to the Swiss CPI slowly. A survey of the data between 1984 and 1996 reveals that oil prices and the CPI were still positively correlated after two years. Since 1997, a change in oil prices seems to affect the CPI more rapidly. The transmission is virtually complete after a mere six to twelve months. While the speed of the pass through from oil prices to the CPI has nearly doubled, the magnitude of the transmission has declined (see Graph 9). Integrated global capital and goods markets have increased competition and led to a generalized reduction in pricing power. In a fiercely competitive environment, producers find it difficult to transfer higher oil prices to consumers. Ongoing competitive pressures and further globalization constitute barriers to incorporating higher oil prices in the price- and wage-setting behavior. A credible central bank with a long-term record of price stability is an additional key parameter ensuring that higher oil prices do not spill over into elevated longer-term inflation expectations. Given the rapid pass through from changes in the price of oil to the CPI, headline inflation figures are subject to frequent base effect related distortions. As a result, various core inflation measures become more important. These reflect the longer-term price dynamics in an economy.
For the time being, the UK has conducted a referendum and triggered Article 50 but doesn’t leave the European Union until March next year: there are no tariff or trade barriers. Yet the pound fell immediately after the referendum result in anticipation of more difficult external trading conditions in the future; this has substantially hurt the purchasing power of UK households. Business investment slowed down – as apparently it has in Canada due to NAFTA uncertainty. The Bank of England estimates that UK real GDP is already 1¾-2% lower than it otherwise would be as a result of Brexit. Fiscal policy Uncertainty about fiscal policy in many advanced economies is a second source of policyinduced uncertainty. Public debt has risen significantly since the Great Recession. Average gross government debt in the Euro Area rose from around 65% of GDP in 2007 to peak at over 90% in 2014 and is currently still over 85%, despite the fact that primary balances have improved on average across the Euro Area. The macroeconomic costs of fiscal uncertainty can be felt even without an actual sovereign debt crisis. Risk premia increase and raise the cost of borrowing but without any riskadjusted increase in return for savers. The risks of fiscal uncertainty are highly non-linear and one could almost say binary due to the reaction function of financial markets, as we have seen since 2010 in the Euro-zone. Below a certain threshold, fiscal uncertainty has very limited effects on sovereign borrowing spreads or economic activity.