The Dallas Fed’s baseline forecast illustrates the scale of that trade-off but also its limits. With the current observed shortfall in global oil supplies, they projected that WTI will average about $94 in April–May and stay above $80 throughout 2026. Under this scenario, U.S. headline PCE inflation in 2026 rises about 0.6% on a fourth-quarter-over-fourth-quarter basis, while core PCE increases by roughly 0.2%.[2]
Given oil’s central role
Source: Federal Reserve Banks of Atlanta, Dallas and Cleveland, U.S. Bureau of Labor Statistics
in modern economies, the shock is increasingly being viewed as an energy-wide disturbance rather than a simple oil story. Bank of America describes the “war dividend” as mild stagflation and highlights that the world is now more sensitive to natural gas and fertilizer prices, particularly in Europe and emerging markets. Their base case assumes oil near $100 a barrel for the rest of the year, which would result in a 0.5% reduction to U.S. gross domestic product, to 2.3% while pushing U.S. headline inflation from 2.8% to 3.6%. Globally, they expect GDP growth to slow to around 3.1% and inflation to edge up toward 3.3%.[3]
.
WHILE THIS EPISODE IS NOT THE SAME AS THE OIL SHOCK OF THE 1970S, CENTRAL BANKS FACE A SIMILAR CHALLENGE.
Scenarios, expectations, and credibility
The Dallas Fed’s baseline scenario assumes that the current, observed shortfall in oil supply persists but does not get any worse. Put simply, the first-round inflation effects are noticeable but not catastrophic, and core inflation remains relatively stable and only modestly above target. Extend the closure to three quarters, the peak WTI price approaches the mid-$160s and the inflation surge roughly doubles, with headline rising by about 1.5% and core by nearly half a percent. A longer disruption does not just add inflation, it materially changes the nature of the shock.
In the Dallas Fed’s baseline work, one-year inflation expectations move only modestly and long-run expectations barely budge, implying that the shock remains painful but broadly manageable so long as credibility holds. But recent survey evidence is less reassuring. The University of Michigan’s latest consumer survey shows one-year inflation expectations rising to 4.8% in May from 3.4% in February, while longer-run expectations rose to 3.9% from 3.5% in April, while consumer sentiment fell sharply.[4]
Similar
Dallas Fed's base case assumes oil
near$100a barrel for the rest of the year, which would
result in a 0.5% reduction to U.S. gross domestic product
modelling from Scotiabank reaches the same conclusion: with expectations anchored, a $100/bbl oil shock can largely be looked through, but once credibility starts to slip, the same energy profile produces a much more persistent inflation and requires materially tighter policy to restore the target.[5]
The latter is therefore not just about how long the
war lasts, but about whether central banks can keep the inflation process anchored while it plays out.
Credibility Lessons from History
History suggests that the key issue in episodes like this are not simply the size of the shock, but whether the public sees the central bank’s response as a policy mistake. A long-run study of central bank credibility across advanced economies from the National Bureau of Economic Research finds that credibility shifts can be large, but they are not necessarily tied to the magnitude of shocks. Instead, credibility tends to be damaged when shocks are perceived as policy errors.[6]
Since oil is an 6 | ADMISI - The Ghost In The Machine | Q2 Edition 2026
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