Oil shocks no longer hit the US economy as they used to - CEPR

A CEPR analysis reports that oil price shocks now have a smaller effect on the US economy than they did in earlier decades. The mechanism behind this change runs through reduced energy intensity of output, lower oil share in household and business spending, and a more flexible labor market that dampens second-round effects on wages and core inflation. Because the transmission of oil prices into headline and core inflation has weakened, the sensitivity of Treasury yields and the Federal Reserve's policy path to crude moves is likely lower than in past episodes, which bears on inflation-linked breakevens and rate-sensitive equities. Macro-focused traders should watch the next Consumer Price Index release for evidence of pass-through from energy to core goods and services, alongside the Fed's communication on whether supply-driven energy price moves are being looked through.

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