Commodity Prices and Inflation Expectations in the United States

Abstract

We find that:  Oil and food price changes have a statistically and economically significant impact on near-term (0–5 year) TIPS-based inflation compensation—as expected, given the direct pass through of commodity prices into headline inflation.  Oil price changes also have statistically significant, but economically small effects on long-term (5–10 year) TIPS-based inflation compensation. These estimated effects are stronger for the post-crisis sample.  Oil price fluctuations appear to have contributed to higher inflation uncertainty since the crisis. In months of large oil price fluctuations, consumers’ longer term inflation expectations are spread out more widely.  Oil price changes had no systematic effect on the expected monetary policy stance before the 2008 crisis, consistent with the inflationary effects of higher oil prices being offset by lower aggregate demand and a wider output gap.  Yet after the crisis, oil price increases have on average led to expectations of a faster monetary policy tightening. This suggests that, during the recovery, markets associated oil price increases with a faster U.S. recovery and a smaller output gap.