Why Don’t Oil Shocks Cause Inflation? Evidence from Disaggregate Inflation Data

Abstract

This paper uses disaggregate U.S. inflation data to evaluate explanations for the breakdown of the relationship between oil price shocks and consumer price inflation. A data set with measures of inflation, energy intensity, labor intensity, and sensitivity to monetary policy is constructed for 97 sectors that make up core CPI inflation. A comparison of the 1973–85 and 1986–2006 time periods reveals that substitution away from energy use in production and monetary policy were both important, with approximately two‐thirds of the change in response of inflation to oil shocks being due to reduced energy usage, and one‐third to monetary policy. We find no evidence that other factors, such as changes in wage rigidities or changes in the persistence of oil shocks, played a role.

An Empirical Characterization of the Dynamic Effects of Police Spending on Violent and Property Crime

“…While bivariate VAR models are commonly used in the structural VAR literature (see, e.g., Atems and Jones ; Bernanke and Blinder ; Bachmeier and Cha ), it is possible that a bivariate VAR model omits relevant information. In that case, the identified police spending shocks may be contaminated by shocks to other variables besides crime rates.…”

Oil price pass-through along the price chain in the euro area

“…Hamilton [1988] marks, from a flexible pricing model, the appearance of frictional unemployment as workers seek to work in other sectors. The adoption of energy-saving technologies in production is also one of the reasons why Blanchard and Galí [2010] and Bachmeier and Cha [2011] explain the progressive reduction of the effects of the oil price shocks on the non-energy inflation.…”

Oil Price Pass-Through into Core Inflation

“…For example, a possible explanation is that part of the decline in the pass-through can be attributed to the adoption of energy-saving technologies (Hooker, 2002;Bachmeier and Cha, 2011), while another explanation (Nordhaus, 2007;Bachmeier and Cha, 2011) points towards a change in the monetary policy response to oil price shocks (see Blinder and Rudd, 2013, for a review). While investigating properly the economic reasons of the decline in the pass-through into core inflation would require a structural model, here we provide some reduced form evidence.…”