The impact of rising oil prices on U.S. inflation and inflation expectations in 2020–23

Abstract

The sustained increase in oil and gasoline prices since mid-2020 has raised fears of persistently high U.S. inflation for years to come and rising inflation expectations, along with concerns about the emergence of a wage-price spiral. Using data through May 2022, we show that these concerns have been overstated. There is no evidence that gasoline price shocks have moved long-run household inflation expectations or that the inflationary effect of gasoline price shocks is persistent. The short-run effects on headline inflation are sizable, but have accounted for only a small fraction of overall inflation. For example, on a year-over-year basis, gasoline price shocks are expected to raise headline PCE inflation by 1.9 percentage points at the end of 2022 and by 0.8 percentage points at the end of 2023, under the assumption that the price of oil remains at $110/barrel after May 2022. In contrast, the impact on core PCE inflation in 2022 and 2023 is only 0.3 percentage points each. These estimates already account for increases in inflation expectations. The peak impact on 1-year household inflation expectations is 0.7 percentage points, while that on 5-year expectations is only 0.15 percentage points.