Unveiling inflation: Oil Shocks, Supply Chain Pressures, and Expectations

Knut Are Aastveit, Hilde Bjørnland (), Jamie Cross and Helene Olsen Kalstad

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: After decades of a stable environment with low inflation in most advanced economies, global inflation rates surged unexpectedly during the pandemic and have remained elevated since. This paper demonstrates that inflation expectations have significantly amplified the global demand and supply shocks triggered by the pandemic, playing a crucial role in sustaining elevated inflation in the post-pandemic regime. We establish this finding by applying a structural vector autoregression model that includes various shocks to global demand and supply, along with domestic inflation and inflation expectations, across six economies: the United States, Canada, New Zealand, the Euro area, the United Kingdom, and Norway. First, we document that global demand and supply shocks in the oil market, as well as disruptions in global supply chains, have been major drivers of the recent inflation surge in all these economies. Then, through various counterfactual exercises, we demonstrate that inflation expectations generally amplify the transmission of global shocks to inflation — particularly in Canada, New Zealand, and the US during the post-pandemic period. As a result, managing inflation expectations should remain a crucial policy objective to mitigate their amplifying effects on inflation.

Keywords: post-pandemic regime; inflationary expectations; elevated inflation; oil prices; supply chain pressures (search for similar items in EconPapers)
JEL-codes: C11 C32 D84 E31 Q41 Q43 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2024-11
New Economics Papers: this item is included in nep-ene and nep-mon
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Working Paper: Unveiling inflation: Oil Shocks, Supply Chain Pressures, and Expectations (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2024-68

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