Oil prices, gasoline prices, and inflation expectations

Abstract

SummaryIt has long been suspected, given the salience of gasoline prices, that fluctuations in gasoline prices shift households' 1‐year inflation expectations. Assessing this view empirically requires the use of dynamic structural models to quantify the cumulative effect of gasoline price shocks on household inflation expectations at each point in time. We find that, on average, gasoline price shocks account for 42% of the variation in these expectations. The cumulative increase in household inflation expectations from early 2009 to early 2013, in particular, is almost entirely explained by unexpectedly rising gasoline prices. However, there is no support for the view that the improved fit of the Phillips curve augmented by household inflation expectations during 2009–2013 is mainly explained by rising gasoline prices.