Has Oil Lost the Capacity to Shock?

10 Pages Posted: 21 Mar 2006

Abstract

Despite a doubling in oil prices since the end of 2003, the UK economy appears to have emerged relatively unscathed. In this speech, David Walton member of the Monetary Policy Committee, examines the reasons for this fairly benign outcome relative to previous episodes of rising oil prices. First, the size and nature of the shock have been different. Oil prices have risen as a consequence of strong global demand rather than as a result of supply disruptions associated with wars. Second, the UK economy has been better placed to absorb the current oil price shock. Unlike some previous episodes, there were few inflationary pressures in the economy when oil prices first began to rise sharply and there has been little sign of second-round effects on inflation from higher wage demands. Third, the monetary policy framework has played an important role. Inflation targeting has helped to anchor inflation expectations, yet it has allowed the MPC to respond flexibly to the oil price shock.

Suggested Citation

Walton, David, Has Oil Lost the Capacity to Shock?. Quarterly Bulletin, Spring 2006, Available at SSRN: https://ssrn.com/abstract=890524

David Walton (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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