Published in Federal Reserve Bank of Cleveland Economic Commentary, November 1, 2006, pages 1-4. Copyright © 2006 Federal Reserve Bank of Cleveland. The definitive version is available at http://www.clevelandfed.org/research/commentary/2006/#11.
Oil price shocks do not cause inflation, no matter how close the connection seems to be in our practical experience. But they can cause significant price increases throughout the economy. Tracing the way a sharp increase in the price of crude oil affects prices in various industrial sectors of the U.S. economy suggests how big these increases are. Fortunately, our economy seems better prepared now to weather such shocks than in the 1970s and 1980s.