A Broader Perspective on the Inflationary Effects of Energy Price Shocks

Lutz Kilian and Xiaoqing Zhou

No 2224, Working Papers from Federal Reserve Bank of Dallas

Abstract: Consumers purchase energy in many forms. Sometimes energy goods are consumed directly, for instance, in the form of gasoline used to operate a vehicle, electricity to light a home or natural gas to heat a home. At other times, the cost of energy is embodied in the prices of goods and services that consumers buy, say when purchasing an airline ticket or when buying online garden furniture made from plastic to be delivered by mail. Previous research has focused on quantifying the pass-through of the price of crude oil or the price of motor gasoline to U.S. inflation. Neither approach accounts for the fact that percent changes in refined product prices need not be proportionate to the percent change in the price of oil, that not all energy is derived from oil and that the correlation of price shocks across energy markets is far from one. This paper develops a vector autoregressive model that quantifies the joint impact of shocks to several energy prices on headline and core CPI inflation. Our analysis confirms that focusing on gasoline price shocks alone will underestimate the inflationary pressures emanating from the energy sector, but not enough to overturn the conclusion that much of the observed increase in headline inflation in 2021 and 2022 reflected non-energy price shocks.

Keywords: headline inflation; core inflation; goods; services; oil; gasoline; diesel; natural gas; electricity (search for similar items in EconPapers)
JEL-codes: E31 E52 Q43 (search for similar items in EconPapers)
Pages: 28
Date: 2022-12-21
New Economics Papers: this item is included in nep-ene and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A broader perspective on the inflationary effects of energy price shocks (2023)
Working Paper: A broader perspective on the inflationary effects of energy price shocks (2023)
Working Paper: A Broader Perspective on the Inflationary Effects of Energy Price Shocks (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:95408

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DOI: 10.24149/wp2224

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