No. 423 - Oil prices and inflation expectations

In line with other recent studies, we find a statistically significant impact of oil price changes on long run inflation expectations in the euro area since the global financial crisis. However, over the same period, (i) oil prices co-moved with economic indicators, such as stock prices, and (ii) the correlation between short and long run expectations increased. Once these factors are taken into account, the effect of oil prices on long-term inflation expectations is no longer significant. This suggests that the link between oil prices and long term inflation expectations is not direct, but rather the result of underlying factors: the prolonged feeble economic conditions and the possible de-anchoring of long-run inflation expectations.