Fed Study Sounds Alarm: Post-Pandemic Oil Price Pass-Through to Core Inflation Has Strengthened, Inflation May Reach 2.8% in 2027

A new study by Federal Reserve researchers finds that after the pandemic, the pass-through effect of oil prices to core inflation has strengthened markedly, and the persistence of core inflation itself has also risen substantially. If this change persists, average core inflation in advanced economies could approach 2.8% in 2027, about 0.6 percentage points higher than under the pre-pandemic inflation mechanism. This finding implies that even as energy price shocks gradually fade, their impact on overall prices may prove more durable than in the past. For the Fed and other major central banks, the inflation risks posed by energy price volatility may be harder to manage than before the pandemic. The study examined data from 2000 through the second quarter of 2026 for five advanced economies: the United States, Canada, the euro area, Japan and the United Kingdom. It found that before the pandemic, a 10-percentage-point rise in oil price inflation relative to other price inflation increased core inflation by only about 0.01 percentage point, and the effect was not statistically significant; after the pandemic, the same magnitude of change in oil price inflation corresponded to an increase in core inflation of about 0.14 percentage point, and was statistically significant. At the same time, the persistence of core inflation has also increased notably. The study estimates that the core inflation persistence coefficient has risen from about 0.35 before the pandemic to about 0.65, implying that inflation shocks may fade more slowly. Incorporating both the stronger oil price pass-through and the rise in inflation persistence into the model better explains inflation dynamics, and its forecast errors are markedly lower than models that consider only the change in inflation persistence or make no adjustment at all. The researchers further used the Brent crude oil futures price curve as of early August 2026 for their calculations. If the post-pandemic strengthening of oil price pass-through and the rise in core inflation persistence continue, average core inflation in advanced economies could approach 2.8% in 2027; only by the end of 2028 might the measure gradually decline to about 2.2%. This result is a scenario estimate based on specific assumptions and is not an official Federal Reserve inflation forecast. The researchers also noted that the post-pandemic statistical results may partly reflect oil prices and overall demand pressures moving in tandem, rather than being entirely the causal effect of oil price shocks themselves, and therefore should not be simply regarded as the pure impact of oil price changes on core inflation. The study also found that in the structural model, a 10% oil price increase triggered by a supply shock has about twice the impact on economic output as before the pandemic. This means energy supply shocks may push up inflation while dragging more heavily on economic activity, complicating the trade-offs for monetary policy: central banks may need to adopt tighter policy to counter inflation pressures, yet must also consider the hit to economic growth. Does the inflation risk fade when oil prices fall? The recent marked decline in international oil prices provides a real-world backdrop for this research. As traders increased bets that the Middle East war may be resolved, Brent crude futures fell nearly 3% on Tuesday after a nearly 6% plunge on Monday, to US$89.96 a barrel, dropping below US$90 a barrel for the first time since August; WTI crude futures fell more than 2% to US$84.63 a barrel. The decline in energy prices is also beginning to pass through to U.S. consumers. According to AAA data, the national average retail price of regular gasoline fell to US$3.98 a gallon on Monday, dropping below the key psychological threshold of US$4 for the first time since mid-July. However, U.S. gasoline prices are still about 19% above the seasonal average, and energy cost pressures have not fully subsided. Since the United States and Israel launched military strikes on Iran in late February this year, the key shipping lane of the Strait of Hormuz has been disrupted, snarling exports and transport of crude oil and refined products and driving energy prices sharply higher. Recently, there have been signs of easing in the Middle East. Trump said on Monday that military action against Iran did not appear necessary at present and that the conflict could end soon. Market hopes have risen somewhat for progress in peace negotiations and a restoration of Middle East energy supplies. However, energy supply risks remain. Although ship traffic through the Strait of Hormuz has recovered somewhat in recent months and total oil shipments in the Middle East are close to pre-war levels, Saudi Arabia's key east-west pipeline was still attacked on Monday. Meanwhile, Ukraine continued to strike Russian refineries, and Russia also targeted energy and civilian infrastructure. The researchers noted that the second-round effects of energy price shocks have not yet become clearly visible, but the related risks may be accumulating. Falling oil prices will undoubtedly help ease short-term inflation pressures, but changes in the post-pandemic inflation transmission mechanism mean energy price volatility may still have a more lasting impact on core inflation and monetary policy.