The Effects of Energy Commodities on CPI

From 2021-2023, the US saw a period of unparalleled inflation. Prompted by the debate on the role of energy prices, this paper investigates the role of rising energy commodities in this inflationary trend. Focusing on the Consumer Price Index (CPI-U), we explore the direct and indirect effects of energy commodity price changes. Despite the sector's 3-5% CPI weight, energy commodities exhibit significant volatility, contributing to 30% of monthly inflation fluctuations on average. The study identifies Gasoline and Fuel oil, both crude oil derivatives, as key components. Additionally, we assess the secondary pass-through effects, mainly through the transportation and industrial sectors. This research provides insights into the substantial impact of energy commodities on inflation and encourages further exploration on this topic, which can enhance economic forecasts and possibly monetary policy forecasts.