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Oil price dynamics and market-based inflation expectations

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  • Hammoudeh, Shawkat
  • Reboredo, Juan C.

Abstract

We examine the link between oil prices and market-based inflation expectations in the United States. Using a Gaussian affine term structure model, we decompose the breakeven inflation into three components: the market-based inflation expectations, the inflation risk premium and the liquidity risk premium. We show that oil prices have a nonlinear impact on the 5- and 10-year market-based inflation expectation components. Specifically, we find that the impact of oil price changes on inflation expectations is more intense when oil prices are above a threshold of 67 USD per barrel and is more pervasive for the intermediate term than for the longer term. Furthermore, we show that oil prices have a nonlinear impact on the inflation risk premium. These results have implications for the management of inflation expectations.

Suggested Citation

  • Hammoudeh, Shawkat & Reboredo, Juan C., 2018. "Oil price dynamics and market-based inflation expectations," Energy Economics, Elsevier, vol. 75(C), pages 484-491.
    • Handle: RePEc:eee:eneeco:v:75:y:2018:i:c:p:484-491
    DOI: 10.1016/j.eneco.2018.09.011
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    3. Qing Nie, 2023. "Has the Asymmetric Effect of Oil Price Change in Inflation Expectations Been Impacted by the COVID-19 Outbreak? A Comparison Between the United States and China," Asian Social Science, Canadian Center of Science and Education, vol. 19(3), pages 1-55, June.
    4. Ferrari, Davide & Ravazzolo, Francesco & Vespignani, Joaquin, 2021. "Forecasting energy commodity prices: A large global dataset sparse approach," Energy Economics, Elsevier, vol. 98(C).
    5. Mensi, Walid & Rehman, Mobeen Ur & Hammoudeh, Shawkat & Vo, Xuan Vinh & Kim, Won Joong, 2023. "How macroeconomic factors drive the linkages between inflation and oil markets in global economies? A multiscale analysis," International Economics, Elsevier, vol. 173(C), pages 212-232.
    6. Liu, Xiaojun & Wang, Yunyuan & Du, Wanying & Ma, Yong, 2022. "Economic policy uncertainty, oil price volatility and stock market returns: Evidence from a nonlinear model," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    7. Tomiwa Sunday Adebayo, 2020. "Dynamic Relationship between Oil Price and Inflation in Oil Exporting Economy: Empirical Evidence from Wavelet Coherence Technique," Energy Economics Letters, Asian Economic and Social Society, vol. 7(1), pages 12-22, June.
    8. Tersoo Shimonkabir Shitile & Nuruddeen Usman, 2020. "Disaggregated Inflation and Asymmetric Oil Price Pass-Through in Nigeria," International Journal of Energy Economics and Policy, Econjournals, vol. 10(1), pages 255-264.
    9. Pal, Debdatta & Mitra, Subrata Kumar, 2019. "Asymmetric oil price transmission to the purchasing power of the U.S. dollar: A multiple threshold NARDL modelling approach," Resources Policy, Elsevier, vol. 64(C).
    10. Inês da Cunha Cabral & Pedro Pires Ribeiro & João Nicolau, 2022. "Changes in inflation compensation and oil prices: short-term and long-term dynamics," Empirical Economics, Springer, vol. 62(2), pages 581-603, February.
    11. İbrahim Özmen & Şerife Özşahin, 2023. "Effects of global energy and price fluctuations on Turkey's inflation: new evidence," Economic Change and Restructuring, Springer, vol. 56(4), pages 2695-2728, August.
    12. Alola, Andrew Adewale & Özkan, Oktay & Usman, Ojonugwa, 2023. "Examining crude oil price outlook amidst substitute energy price and household energy expenditure in the USA: A novel nonparametric multivariate QQR approach," Energy Economics, Elsevier, vol. 120(C).
    13. Sam Devore & Eric Olson, 2021. "The Surprising Stability Between Gas Prices and Expected Inflation," Economics Bulletin, AccessEcon, vol. 41(2), pages 710-719.
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    16. Ahmed S. Alimi & Oladotun D. Olaniran & Timothy Ayuba, 2020. "An Assymetric Evaluation of Oil Price- Inflation Nexus: Evidence from Nigeria," Energy Economics Letters, Asian Economic and Social Society, vol. 7(1), pages 1-11, June.

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    More about this item

    Keywords

    Inflation expectations; Inflation risk premium; Oil prices; Threshold;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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