Oil supply shocks drive persistent inflation tail risks
A Banco de España working paper examines the asymmetric transmission of oil supply shocks to inflation distributions in the United States, the euro area, and the United Kingdom. Researchers find that while median responses are transitory, the 90th quantile exhibits persistent increases beyond one year.
Quantifying the upside tail
Researchers Andrea De Polis, Álvaro Fernández-Gallardo, and José Nicolás Rosas analyze monthly data from 1975 to 2025 using quantile local projections and high-frequency surprises around OPEC announcements.
They document a stark structural asymmetry across the United States, the euro area, and the United Kingdom.
While median inflation responses are transitory and die out within a year, the 90th quantile shows significant and persistent upward pressures.
This upside tail sensitivity indicates that oil disruptions act as structural innovations modifying the skewness of future inflation distributions rather than merely shifting the central tendency.
Non-linearities in price setting
The authors attribute these persistent upside risks to the non-linearity of price-setting mechanisms, borrowing insights from the state-dependent pricing literature.
When supply shocks hit, price adjustments get amplified under specific economic conditions, creating lasting risks for price stability.
The findings imply that central banks should monitor the full distribution of future inflation rather than focusing exclusively on the central tendency, ensuring that anchored expectations do not fracture during volatile energy episodes.
A blind spot in monetary policy
Traditional models that rely solely on median inflation forecasts miss the hidden dangers lurking in the distribution tails.
By ignoring persistent upside skewness, central banks risk reacting too late to structural oil shocks.
Policymakers must adopt a distribution-wide perspective to safeguard credibility.