Oil price fluctuations on inflation and inflation expectations
In this paper, Kilian and Zhou use a structural vector autoregressive (VAR) model of the relationship between nominal retail gasoline prices, headline inflation, core inflation, and the Michigan Survey of Consumers median 1-year and 5-year inflation expectations. Their model is based on the assumption that it’s gasoline prices that affect household expectations rather than the price of crude oil because of the former’s salience. Among their findings is:
A $100 oil scenario would only briefly raise monthly headline inflation, before fading rather quickly. However, the short-run effects on headline inflation would be sizable. Similarly, for inflation expectations the steepest increase is observed in the 1-year ahead household inflation expectations and then fades away significantly in the 5-year ahead inflation expectations.
The scenarios they study all assume an increase of oil prices to around $100 per barrel which is rather short-lived. Their model though provides the tools necessary to study more extreme scenarios where oil prices increase beyond $100 a barrel and remain elevated for a longer period of time.
The Impact of Rising Oil Prices on U.S. Inflation and Inflation Expectations in 2020-23
Authors: Lutz Kilian, Xiaoqing Zhou
From: Federal Reserve Bank of Dallas
The distributional effects of fuel price increases
In this paper, Kpodar and Liu combine household survey data with the CPI components to construct a CPI index for the poorest and richest income quintiles in order to assess the distributional impact of the pass-through. They update the Global Monthly Retail Fuel Price Database, by including premium and regular fuels, and increase the sample to 190 countries for the time period ending in December 2020. They find that:
- Studies using crude oil prices instead of retail fuel prices to estimate the pass-through to inflation significantly underestimate it, in confirmation of the Kilian and Zhou assumption above.
- The response of inflation to gasoline price shocks is smaller, but more persistent and broad-based in developing economies than in advanced economies.
- While the purchasing power of all households declines as fuel prices increase, the distributional impact is progressive. But the progressivity phases out within 6 months after the shock in advanced economies, whereas it persists beyond a year in developing countries.
The Distributional Implications of the Impact of Fuel Price Increases on Inflation
Authors: Kangni Kpodar, Boya Liu
From: International Monetary Fund
An eerie comparison
In 1973 inflation in the U.S. rose significantly. The explanations offered then:
- A Soviet crop failure that caused global wheat prices to soar.
- A war in the Middle East that caused a global oil price shock.
- Too much fiscal stimulus during the previous year.
Do you remember 1973?
By: Scott Sumner – George Mason University
