How do oil price shocks affect consumer prices?

This paper evaluates the degree of pass-through from oil price shocks to disaggregate U.S. consumer prices. We find significantly positive effects of the oil price shock only on energy-intensive CPIs, which imply that significantly positive, though quantitatively small, response of the total CPI is mainly driven by substantial increases in prices of energy-related commodities. Unexpected changes in the oil price may result in decreases in the budget for non-energy commodities, if the demand for energy is inelastic (Edelstein and Kilian, 2009). Decreases in the demand for non-energy commodities will then result in limited influences on prices of those goods, which is consistent with our empirical findings.