Oil Price Shocks and Inflation

The historical record Figure 1 plots the price of oil relative to the core personal consumption expenditures price index (PCEPI) together with the core PCEPI inflation rate. (Core measures of inflation exclude food and energy prices.) The figure shows that the price of oil jumped sharply twice in the 1970s, as did inflation. But this relationship appears to have deteriorated over the latter part of the sample; for example, when oil prices fell sharply in the mid-1980s, core inflation appears to have been unaffected. Similarly, the last part of our sample shows a sustained increase in the relative price of oil that does not appear to be reflected in inflation.