Inflation Expectations and How it Explains the Inflationary Impact of Oil Price Shocks: Evidence from the Michigan Survey

Analysis of the Michigan Survey data confirms U.S. inflation expectations are not perfectly anchored in the event of an oil price shock. Two key results emerge through counterfactual analysis. First, better anchoring of inflation expectations can ameliorate the mild inflation impact which occurs 10 to 12 months after an oil price shock. Second, an initial large burst of inflation from an oil price shock always occurs regardless whether inflation expectations are anchored or not. Therefore, while better anchoring of inflation expectations can lead to better inflation outcomes, these gains can be limited.