Page 14 - Invited Paper Session (IPS) - Volume 2

IPS178 Sana Antoine S. J.

Communicating on Lebanese inflation:
Deciphering the impact of imported inflation
Sana Antoine Souaid Jad
Banque du Liban, Beirut, Lebanon

Abstract
The main purpose of this paper is to estimate the importance of imported
inflation in the total headline inflation computed using the Consumer Price
Index for the Lebanese economy. For decision-makers, it is crucial to
disentangle the effect of foreign exogenous factors from domestic ones on
headline inflation in order to conduct the monetary policy optimally. Since
Lebanon’s consumption is mainly based on imports and highly exposed to
international price fluctuations, imported inflation plays a prominent role and
its amplitude should be measured.
Two different approaches have been followed to estimate the share of
imported inflation: a sectorial approach and a model estimation. In the first
approach, we use the structure of the Lebanese Consumer Price Index
(contribution of each component in the final CPI basket) in order to evaluate
the share of variation due to the externally driven items. In this context and
given the big share of imported volatile items such as food and energy and
their significant contribution in the inflation process, a closer analysis between
headline and core inflation is performed.
In the second approach, we estimate an econometric model where changes
1
in CPI originate from domestic factors (money supply, interest rates) and
2
external ones (Brent price, effective exchange rate ). The share of inflation
volatility due to external factors is computed and compared to the results
found in the first approach.
As expected, both approaches show that imported inflation plays a major role
in headline inflation since it accounts for 50% of the total volatility of headline
inflation as per approach 1 and around 40% based on approach 2. These
results prove that Lebanon is quite vulnerable to external shocks which can
have significant repercussions on the monetary policy of the country.

Keywords
headline inflation; core inflation; imports; exchange rates; Brent prices.

1 Based on the BDL Statistics and Economic Research Department’s current inflation model.
The Lebanese Pound is pegged to the US Dollar meaning that fluctuations in the EER are
2
essentially due to variations in the USD/EUR exchange rate (EU is the main trading partner of
Lebanon). Thus, a shock on EER can be considered completely exogenous to the Lebanese
economy.
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