Inflation expectations and the pass-through of oil prices

In the new CAMP working paper 03/2020, Aastveit, Bjørnland and Cross examine whether inflation expectations and the associated pass-through of oil price shocks depend on demand and supply conditions underlying the global market for crude oil. They use a novel structural VAR model of the global oil market that jointly identifies transmissions of oil demand and supply shock through the real price of oil to both expected and realized inflation. They find that US households form their expectations of inflation differently when faced with long sustained increases in the price of oil as compared to short and sharp price fluctuations. Furthermore, they 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.



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