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Oil Price Shocks and Inflation

Working Paper
Lutz Kilian, Xiaoqing Zhou
Federal Reserve Bank of Dallas, Research Department, Working Paper 2312, August 2023


Despite growing interest in the impact of oil and other energy price shocks on inflation and inflation expectations, until recently this question has not received much attention. This survey not only presents empirical results for the U.S. economy, but expands the analysis to include other major economies. We find that only in the Euro area and in the U.K. energy price shocks are associated with a material increase in core consumer prices. This helps explain the somewhat more persistent response of headline inflation in these countries than in the U.S. or Canada. Inflation is even less sensitive to energy price shocks in Japan. We document that energy price shocks played a more important role in explaining headline inflation in the Euro area in 2021 and 2022 than in the U.S. This does not mean that energy price shocks have de-anchored inflation expectations, however. While suitable data on long-run inflation expectations are scant, neither for the U.S. nor the U.K. is there evidence that energy price shocks have materially changed long-run inflation expectations.