Oil Prices and Inflation Expectations

Abstract

In line with other recent studies, we find that oil price changes have had a statistically significant impact on long-term inflation expectations in the euro area since the global financial crisis. However, over the same period, (i) oil prices have shifted together with economic indicators, such as stock prices, and (ii) the correlation between short- and long-term expectations has increased. Once these factors are taken into account, the effect of oil prices on long-term inflation expectations is no longer significant. This suggests that the link between oil prices and long-term inflation expectations is not direct, but rather the result of underlying factors: the prolonged feeble economic conditions and the possible de-anchoring of long-term inflation expectations from the objective of price stability.

Keywords: inflation expectations, oil prices, inflation swaps, de-anchoring, monetary policy

JEL Classification: C20, E31, E59, Q41