Oil prices are an important inflation factor in a small economy strongly dependent on oil imports.
There are two ways in which oil prices pass through into domestic inflation. This price effect is fairly significant. In this case, the impact of oil price changes on the prices of related products is difficult to monitor, as it is modified significantly by numerous other factors, e.g. the phase of the business cycle, competition on the markets for individual products, and the capacity of companies to absorb costs. It is very difficult to quantify these indirect effects when forecasting the future inflation profile. A similarly important complication in forecasting the effect of oil prices on inflation is their high volatility.