What is the role of perceived oil price shocks in inflation expectations?

Not much. We identify the perceived oil price shock, as well as perceived global demand and supply shocks, using sign restrictions in a factor-augmented vector autoregression model that includes forecasts for crude oil price growth, real GDP growth, and inflation across 84 economies. The perceived oil price shock explains only 10% of the fluctuations, on average, in global inflation expectations from January 2012 to December 2022, and accounts for an even smaller fraction during the COVID-19 pandemic. Allowing for the oil price noise shock – reflecting exogenous shifts in agents’ optimism and pessimism – does not materially change the limited pass-through of the perceived oil price shock to inflation expectations. In contrast, perceived global supply and demand shocks dominate, especially since the onset of the pandemic. Over the first eight months, professional forecasters viewed the pandemic, on net, as a negative demand shock and lowered their short-term inflation expectations. In early 2021, professionals quickly switched their views and sharply increased their inflation expectations amid burgeoning and persistent supply chain disruptions and labor constraints.