> Taking into consideration the path of oil and gasoline prices in each case, the model predicts that closing the Strait of Hormuz for 1, 2, or 3 quarters would increase Q4/Q4 headline PCE inflation in 2026 by 0.35, 0.79 and 1.47 percentage points, respectively. The corresponding effect on core PCE inflation would only be 0.18 percentage points if the closure ends after one quarter,
but would rise to 0.31 and 0.49 percentage points if the closure persists for two or three quarters, suggesting potentially sizable effects on core inflation. These effects are not associated with a shift
in household inflation expectations. The effect on 1-year inflation expectations by 2026Q4 is quite modest, ranging from near 0 when the closure lasts 1 or 2 quarters to 0.61 when it lasts 3 quarters.
The effects on 5-10 year inflation expectations are even smaller, ranging from 0 to 0.07 percentage points. The overall effects on Q4/Q4 inflation mask considerable heterogeneity in how gasoline
price shocks affect PCE inflation in 2026, depending on how long the Strait remains closed.
Ticksdonthavelymph on
Well the good news? is that they aren’t predicting dramatic long term high inflation like in the 70s from it I guess. I don’t understand how this is just that transitory an event though-
EconomistWithaD on
Before a few thoughts, and although I explain it more below, I think Figure 6 may be picking up potential recession probability.
1. A former student who just graduated last year and is now at the Dallas Fed was a major RA on this.
3. Given that the magnitudes of inflation are about double to 5x the magnitude to the paper above, GDP impacts could be quite significant.
4. Figure 6 is interesting. It shows that headline PCE will be negative after several months after the shock. This is why people say the Fed should “look past” oil shocks, if possible. These negative areas are likely due to considerably reduced economic activity; this is why you can “look past them”. But that looks awfully close to a possible recession indicator
3 Comments
key graph from the introduction:
> Taking into consideration the path of oil and gasoline prices in each case, the model predicts that closing the Strait of Hormuz for 1, 2, or 3 quarters would increase Q4/Q4 headline PCE inflation in 2026 by 0.35, 0.79 and 1.47 percentage points, respectively. The corresponding effect on core PCE inflation would only be 0.18 percentage points if the closure ends after one quarter,
but would rise to 0.31 and 0.49 percentage points if the closure persists for two or three quarters, suggesting potentially sizable effects on core inflation. These effects are not associated with a shift
in household inflation expectations. The effect on 1-year inflation expectations by 2026Q4 is quite modest, ranging from near 0 when the closure lasts 1 or 2 quarters to 0.61 when it lasts 3 quarters.
The effects on 5-10 year inflation expectations are even smaller, ranging from 0 to 0.07 percentage points. The overall effects on Q4/Q4 inflation mask considerable heterogeneity in how gasoline
price shocks affect PCE inflation in 2026, depending on how long the Strait remains closed.
Well the good news? is that they aren’t predicting dramatic long term high inflation like in the 70s from it I guess. I don’t understand how this is just that transitory an event though-
Before a few thoughts, and although I explain it more below, I think Figure 6 may be picking up potential recession probability.
1. A former student who just graduated last year and is now at the Dallas Fed was a major RA on this.
2. Notably, the impacts on inflation are more immediate, but less long lasting, than a similar analysis done by [the Fed](https://www.federalreserve.gov/econres/notes/feds-notes/oil-price-shocks-and-inflation-in-a-dsge-model-of-the-global-economy-20240802.html)
3. Given that the magnitudes of inflation are about double to 5x the magnitude to the paper above, GDP impacts could be quite significant.
4. Figure 6 is interesting. It shows that headline PCE will be negative after several months after the shock. This is why people say the Fed should “look past” oil shocks, if possible. These negative areas are likely due to considerably reduced economic activity; this is why you can “look past them”. But that looks awfully close to a possible recession indicator