Inflation expectations and the pass-through of oil prices

Do inflation expectations and the associated pass-through of oil price shocks depend on
demand and supply conditions underlying the global market for crude oil? We answer this
question with a novel structural vector autoregressive model of the global oil market that
jointly identifies transmissions of oil demand and supply shocks through the real price of
oil to both expected and realized inflation. Our main insight is that US households form
their expectations of inflation differently when faced with long sustained increases in the
price of oil, such as the early millennium oil price surge of 2003 to 2008, as compared to
short and sharp price fluctuations that characterized much of the twentieth century. We
also find that oil demand and supply shocks can explain a large proportion of expected
and realized inflation dynamics during multiple periods of economic significance, and
resolve disagreements around the role of oil prices in explaining the missing deflation
puzzle of the Great Recession.