Discussion Paper

How Could Oil Price and Policy Rate Hikes Affect the Near-Term Inflation Outlook?

Abstract: Since the start of the year, oil prices have risen sharply owing to worsening expectations regarding global oil supply. We’ve also had an acceleration of inflation in the United States and the euro area, as well as a sharp steepening of the expected paths of policy rates in both economies. These factors, combined with the potential for a slowdown in growth, have made the inflation outlook quite uncertain. In this post, we combine the demand and supply oil price decomposition from the New York Fed’s Oil Price Dynamics Report with yield curve data to quantify the likely path of inflation in the United States and the euro area over the next twelve months. Based on our analysis, we anticipate that inflation will likely remain elevated through the second quarter of 2023, despite payback for the inflationary impact of current negative oil supply shocks during the second half of 2022 and the disinflationary effects of tighter monetary policy.

Keywords: inflation; oil prices; interest rates; forecasting;

JEL Classification: E2; G1;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2022-06-24

Number: 20220624