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Fed: Lingering Oil Price Hikes Now Hurt More
11 Nov
Summary
- Oil shocks now persist longer, impacting core inflation significantly.
- Post-pandemic economy shows higher sensitivity to energy price changes.
- Central bankers face new challenges managing persistent inflation.
New research from the Federal Reserve suggests that oil price shocks are contributing to inflation for longer periods than previously observed. These "transitory" energy price increases are now having a more significant and unpleasant impact on the economy, leading to persistent inflation in the post-pandemic era.
The findings indicate that oil shocks are more strongly influencing core inflation. This presents a challenge for central bankers, as they can no longer dismiss oil price spikes as fleeting events. In earlier times, such increases would quickly fade and remain confined to headline inflation.
However, the current economic landscape, marked by post-COVID inflation, geopolitical conflicts, and ongoing supply chain disruptions, has altered these dynamics. The Fed's research implies that elevated oil prices could notably increase core inflation in advanced economies over the next few years if current trends continue.
The central bank cautions that this observed persistence is based on a relatively short period since the pandemic. While it could represent a new economic reality, it might also be an anomaly. Nevertheless, the potential for inflation to rise remains an upside risk if oil prices stay high or supply chain issues persist.
