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How OPEC Oil Shocks Shape U.S. CPI Inflation: Evidence from an IV-SVAR Approach

Author

Listed:
  • Subash Bhandari
  • Hyeongwoo Kim

Abstract

This paper investigates the transmission of structural global oil market shocks to U.S. inflation using an IV-SVAR approach applied to highly disaggregated CPI components. We specifically utilize oil supply news shocks-market expectations of future OPEC production changes-and find that a news-driven 10% oil price increase triggers a significant 5% surge in headline inflation. Analyzing over 55 sectoral indexes reveals that these effects are heavily concentrated in energy-related goods, while other components remain muted or respond negatively. We identify consumer budget reallocation as a primary mitigating mechanism: households facing rising energy costs shift demand toward more affordable alternatives, such as used vehicles and food at home. By employing weak-instrument robust inference, this study demonstrates that headline inflation dynamics are driven by specific energy sub-components and adaptive consumer behavior rather than broad-based sectoral increases.

Suggested Citation

  • Subash Bhandari & Hyeongwoo Kim, 2026. "How OPEC Oil Shocks Shape U.S. CPI Inflation: Evidence from an IV-SVAR Approach," Auburn Economics Working Paper Series auwp2026-06, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2026-06
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    File URL: https://cla.auburn.edu/econwp/Archives/2026/2026-06.pdf
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    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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