Inflation: Energy shocks, sectoral inflation, and the energy transition - James H. Stock, Harvard University

Persistence of housing & services inflation VAR • Variables: o PCE-energy (12 mo) o PCE-services (12 mo) o CPI-housing (12 mo) o Ugap o SPF-10 year expectations • Energy ordered first • Estimation 1984-2022m6 • Focus on dynamics (persistence) of the disinflation post-2022m6 – does observed persistence match actual? 5 1. [...] & European winters) • As energy shocks have reverted, so have services and housing prices • Implications: Absent energy price shocks, housing and services inflation will be in normal range in 8-12 months • A (too?) simple story – no supply chain disruptions, no v/u, no nonlinearities, no FTPL, not even COVID-induced consumption switching 6 2. [...] Energy price shocks and inflation – a pass-through perspective t = + (L)wt + ut • Plot is cumulative coefficients • Monthly data • Inflation: PCE-xfe • Energy: PCE-energy 1968-1983 • Pass-through from energy to core is greater during the current episode than since 1984 – but less than in the 1970s • XFE has energy-sensitive 2020-2024m3 components, e.g.: o Air travel services 1984-1999 o Freig. [...] power generation • Implication: greater volatility – and higher levels – of home heating Source: Stock and Zaragosa-Watkins and electricity prices (NBER wp 32228, March 2024) • Gas & oil will be important over (at least) the next 10 years • Will geopolitics of the energy transition be Analysts’ estimate of liquefaction, transportation, tranquil? and regasification (LTR) cost in 2019 8 3b. [...] Renewables and EVs: disinflationary and – in the long run – lower volatility Solar price declines (%/yr) 1975-2012 - 12.2% Renewables and EVs will reduce dependency 2012-2022 -12.8% on fossil fuels, total fossil fuel share of GDP, and – in the long run – will reduce volatility.