Unanchored inflation expectations double energy shock impact on prices
A Bank for International Settlements study shows that global energy supply shocks produce more than double the impact on core inflation when household inflation expectations exceed central bank targets. The analysis highlights distinct trade-offs across importing and exporting economies.
Anatomy of a 120 percent price spike
During the conflict in Iran, global oil supply contracted by nearly 15 percent, driving oil prices up by over 120 percent from pre-war lows.
By comparison, crude spiked 180 percent after the 1990 Iraq-Kuwait war and 77 percent following Russia's 2022 invasion of Ukraine.
Natural gas prices in Asia doubled during the first month of the Iran conflict.
Beyond crude oil, prolonged closure of the Strait of Hormuz disrupted critical non-energy inputs, including agricultural fertilizers and helium for semiconductor manufacturing.
BIS researchers Ryan Banerjee, Fiorella De Fiore, Marco Lombardi and Giovanni Lombardo note that initial conditions—such as higher household inflation expectations—amplify second-round pass-through to core inflation compared to periods with well-anchored targets.
Divergent paths for importers and exporters
The transmission of supply shocks varies dramatically by structural exposure.
Energy exporters benefit from improved terms of trade and currency appreciation that cushions price pressure, whereas commodity importers face currency depreciation and compounded inflation.
Furthermore, tighter monetary policy and smaller fiscal deficits prior to the recent shock helped restrain aggregate demand compared to the 2022 episode.
However, elevated inflation expectations in advanced economies continue to heighten the risk of persistent price pressures.
No room for central bank inertia
Central banks attempting to look through energy spikes face a dangerous trade-off.
While waiting for clear data limits immediate output damage, unanchored expectations quickly turn temporary price shocks into entrenched inflation.
Rapid monetary tightening remains the only safe hedge when public trust in target stability is already fragile.