Do Energy Price Spikes Cause Inflation?
Many people mistakenly believe that a sharp rise in the price of energy is necessarily inflationary. They fail to understand that energy prices adjust to the demand and supply of energy, whereas inflation responds to thed emand and supply of money. This Economic Commentary explains that the Federal Reserve can do nothing about relative energy prices, but it can determine how relative energy price shocks are reflected in the overall level of prices. Over the last 20 years, the inflationary consequences of energy price shocks, while significant, have been fairly subdued.
The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. The series editor is Tasia Hane. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This paper and its data are subject to revision; please visit clevelandfed.org for updates.