Board of Governors of the Federal Reserve System

Figure 1. Effects of Foreign Oil Supply Shock on U.S. Inflation and GDP

The figure has 4 panels: U.S. Real Oil Price, U.S. Headline Inflation (4q), U.S. Core Inflation (4q), and U.S. Real GDP. All panels have a black line and red line which correspond to the impulse response of the baseline model (black) and lower wage stickiness model (red) to an adverse oil supply shock, except for the U.S. Real Oil Price panel which only shows the baseline’s response. The U.S. Real Oil Price panel shows the U.S. oil price increasing by 10 percent in quarter 1, which then slowly declines to around 5.9 percent in quarter 20. The U.S. Headline Inflation (4q) panel shows the baseline model resulting in an increase of 0.15 percent in the first 4 quarters before falling sharply to 0.03 percent by quarter 6 before slowly declining to slightly under 0 percent by quarter 20. The lower wage stickiness line is slightly below the baseline and from quarter 7 to quarter 20 it is negative. The U.S. Core Inflation (4q) panel has the baseline core inflation increasing 0.06 percent from quarter 1 to 4 before decline down to 0 by quarter 20. The lower wage stickiness core inflation is much lower than baseline core inflation and becomes negative from quarter 8 to 20. The U.S. Real GDP panel is negative except for in the first quarter. Both baseline and lower wage stickiness follow closely until quarter 4 where both are at -0.04 percent before lower wage stickiness becomes slightly less negative than baseline for the rest of the quarters. Baseline U.S. Real GDP end slightly above -0.06 percent and lower wage stickiness ends slightly below -0.06 percent.

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Figure 2. Effects of Foreign Oil Supply Shock on U.S. Labor Costs

This figure has 3 panels: U.S. Real Marginal Cost, U.S. Real Wage Gap, and U.S. Real Wage. All panels feature a red and black line, where the black is the baseline, and the red line is lower wage stickiness. The first panel, U.S. Real Marginal Cost, shows both lines starting at 0.1 percent before decreasing to around 0 percent. The real marginal cost for lower wage stickiness remains slightly lower than the baseline real marginal cost. The second panel, U.S. Real Wage Gap, starts similarly at 0.1 percent before decreasing gradually down to 0. It looks very similar to the chart in the first panel, except the gap between baseline and lower wage stickiness is slightly larger. The third panel, U.S. Real Wage, starts at -0.02 percent before ending at -0.09 percent in quarter 20. The baseline is higher than lower wage stickiness across all quarters with a gap similar in size as panel 2.

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Figure 3. Oil Prices

This figure is a line graph for the brent spot price where the x-axis ranges from 2016Q1 to 2024Q1 and the y-axis shows dollars per barrel. There is a dotted vertical line in February 2022 with the label Russia’s Invasion of Ukraine. The data shown is of daily frequency and sourced from Bloomberg. The brent spot price starts at 37 dollars before dropping sharply to 19 dollars in April 2020 and then the price starts to climb until around 128 dollars in 2022. The price then remains the same for a few more quarters before dropping to 80 dollars per barrel in 2024Q1.

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Figure 4. Effects of 2022H1 Foreign Oil Shock on U.S. Inflation

This figure has two bar plot panels: U.S. Headline Prices and U.S. Core Prices. Both plots show the 2022Q1 to Q4 quarterly percent change annual rate of their respective prices. The grey bars represent the contribution to U.S. headline and core inflation from an oil supply shock in 2022Q1 using the GEMUS model. For the U.S. Headline Prices panel, the annual rate starts at 0.93 percent in 2022Q1, 0.64 percent in 2022Q2, 0.15 percent in 2022Q3 and 0.11 percent in 2022Q4. In the U.S. Core Prices panel, the annual rate starts at 0.13 percent in 2022Q1, 0.22 percent in 2022Q2, 0.19 percent in 2022Q3, and 0.15 percent in 2022Q4.

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