The impact of high energy prices on the European economy
In this paper, Hilde C. Bjørnland puts the recent energy price surge in perspective amid geopolitical developments and supply disruptions, and analyses the effects on global activity and inflation, focusing in particular on Europe. Her main takeaways are:
- On average, a 10 percent increase in oil prices due to geopolitical tensions or supply constraints will reduce GDP in the euro area by 0.5 percent after two years. Hence, a 30 percent increase in oil prices, can reduce GDP in the euro area by 1.5 percent, all else equal. The effect will be even larger when oil price volatility is also high as it is now.
- The transmission of oil price shocks on U.S. activity has changed with the shale oil boom, and activity and wages in many manufacturing-intensive states now increase following oil price increases, potentially also fueling inflation further. So far there is little to suggest the real effects will spill over to European countries, as the direct trade linkages are likely to have a modest impact on activity in Europe.
- Although the effects of oil price shocks on inflation are smaller when policymakers respond strongly, there is still a substantial share of inflation being explained by the oil price shocks. This suggests that during periods of high oil price volatility, stabilizing inflation is difficult, although important.
The effect of rising energy prices amid geopolitical developments and supply disruptions
Author: Hilde C. Bjørnland
From: BI Norwegian Business School
The impact of high energy prices on the U.S. economy
Can U.S. fuel consumption withstand higher prices for much longer? This is the question Garrett Golding is attempting to answer in this commentary. In the U.S. fuel demand is price inelastic as most consumers must drive to work, school, grocery stores and other destinations every day. Using public transportation is an alternative mainly for those in dense urban areas.
A continuation of the work-from-home trend could help reduce fuel demand and increase price elasticity going forward, though it is too early to fully assess the impact. Complicating matters are lower-wage workers, who are the least likely to have work-from-home options and are the most challenged by high fuel prices. the recent jump in crude oil and hence diesel prices implies that a U.S. worker in the first quartile of income (the lowest 25 percent), will now have to spend 9 percent of earnings on gasoline purchases instead of 4 percent a little more than a year earlier.
All told, fuel prices may be closer to consumers’ pain threshold than inflation-adjusted prices might suggest. And if prices climb higher, expect consumers to respond by cutting back on fuel consumption and overall spending sooner than later.
High Fuel Prices in the U.S. May Crimp Oil Demand Soon
By: Garrett Golding – Federal Reserve Bank of Dallas
