Inflation Expectations and the Pass-through of Oil Prices

36 Pages Posted: 16 Jul 2020

See all articles by Knut Are Aastveit

Knut Are Aastveit

Norges Bank

Hilde C. Bjørnland

Norwegian School of Management (BI); Norges Bank

Jamie Cross

Center of Applied Macroeconomics and Commodity Prices (CAMP), BI Norwegian Business School; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: July 7, 2020

Abstract

Do inflation expectations and the associated pass-through of oil price shocks depend on demand and supply conditions underlying the global market for crude oil? We answer this question with a novel structural vector autoregressive model of the global oil market that jointly identifies transmissions of oil demand and supply shocks through the real price of oil to both expected and realized inflation. Our main insight is that US households form their expectations of inflation differently when faced with long sustained increases in the price of oil, such as the early millennium oil price surge of 2003 to 2008, as compared to short and sharp price fluctuations that characterized much of the twentieth century. We also find that oil demand and supply shocks can explain a large proportion of expected and realized inflation dynamics during multiple periods of economic significance, and resolve disagreements around the role of oil prices in explaining the missing deflation puzzle of the Great Recession.

Keywords: Inflation expectations, inflation pass-through, oil prices

JEL Classification: E31, D84, Q41, Q43

Suggested Citation

Aastveit, Knut Are and Bjørnland, Hilde C. and Cross, Jamie, Inflation Expectations and the Pass-through of Oil Prices (July 7, 2020). CAMA Working Paper No. 64/2020, Available at SSRN: https://ssrn.com/abstract=3644752 or http://dx.doi.org/10.2139/ssrn.3644752

Knut Are Aastveit

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Hilde C. Bjørnland (Contact Author)

Norwegian School of Management (BI) ( email )

P.O. Box 580
N-1302 Sandvika
Norway

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Jamie Cross

Center of Applied Macroeconomics and Commodity Prices (CAMP), BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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