The Role of Gasoline Price Expectations in Transmitting Gasoline Price Shocks to Inflation and Real Activity

Abstract

This paper argues that gasoline price fluctuations affect inflation through changes in consumer expectations about future energy costs. More precisely, we use data from the US Michigan Survey of Consumers and estimate a Structural VAR model to show that long-run gasoline price expectations are an important transmission channel through which gasoline price shocks are propagated to both inflation and real economic activity. These findings suggest that monitoring consumer energy price expectations offers policymakers an early warning signal for inflationary pressure, which is a useful tool in addition to broader inflation anchoring. As energy market volatility intensifies in an era of geopolitical uncertainty and green transition, understanding this channel becomes increasingly important for monetary policy.