Gasoline Prices, Gasoline Price Expectations, and Inflation Expectations in the United States

We analyze whether and to what extent gasoline price shocks influenced headline inflation, one-year gasoline price inflation expectations, and one-year inflation expectations in the United States using a partially identified Bayesian structural vector autoregression model. Results show that headline inflation and one-year inflation expectations increased instantaneously in response to gasoline price shocks, with the effects on one-year inflation expectations being considerably more persistent. The effects on one-year gasoline price inflation expectations were noticeably different. Although these expectations increased initially, they declined two months after the shock, with the effects dissipating shortly thereafter. Variance decomposition reveals that gasoline price shocks explained 66.18 %, 12.06 %, and 22.42 % of the variation in headline inflation, one-year gasoline price inflation expectations, and one-year inflation expectations, respectively.