The inflationary impact of oil price shock in Korea: The role of inflation expectations

Abstract

This study explores whether inflation expectations amplify the influence of oil price shocks on inflation. By using 1-year and 5-year inflation expectations derived from nominal bond yields, we measure second-round effects based on the inflationary context. Our findings validate the sensitivity of expected inflation to oil shocks and its significant transmission to inflation. Specifically, during periods of high inflation, inflation driven by production costs takes precedence, while in low inflation environments, the second-round effects become the primary driver of inflation responses to oil price fluctuations. Our findings underscore the importance for policymakers to consider the asymmetric transmission of inflation expectations in response to oil price shocks across different inflationary environments when aiming to achieve price stability.