Federal Reserve FEDS Notes·Nov 9, 2026, 9:00 AM ET

The Effect of Oil Prices on Core Inflation: Recent Evidence from the Advanced Economies

Elevated oil prices and geopolitical uncertainty have renewed questions about whether supply shocks pose transitory or persistent threats to price stability.
The study updates previous findings by documenting a second change in the inflation process: an increase in the pass-through from oil prices to core inflation in addition to greater persistence.
Researchers used a panel of five major advanced economies (Canada, euro area, Japan, U.K., U.S.) with data through mid-2026 to robustly detect common shifts in inflation dynamics.
Pre-pandemic oil-price pass-through to core inflation was statistically indistinguishable from zero, whereas post-pandemic pass-through rose to a statistically significant level.
Core inflation persistence roughly doubled after the pandemic, increasing from 0.35 pre-pandemic to approximately 0.65 post-pandemic.
A model allowing for both stronger persistence and higher pass-through tracks recent core inflation dynamics significantly better than models with constant coefficients.
A permanent 10 percent increase in oil prices now raises the core price level by 0.35 percent after three years, compared to only 0.05 percent under pre-pandemic dynamics.
Forecasts suggest that if current trends continue, the 2026 oil price rise could push advanced-economy core inflation to nearly 2.8 percent by mid-2027.
Structural model simulations indicate that higher pass-through combined with persistence would cause larger, more persistent inflation spikes and a GDP contraction twice as large as under pre-pandemic conditions.
The authors caution that results are derived from a reduced-form approach, depend on specific model specifications, and may not endure if the post-pandemic environment normalizes.
The findings do not represent official inflation forecasts but highlight an upside risk to inflation if oil prices remain elevated or supply-chain disruptions persist.