The Oil Shock's Second Round Runs Through Expectations

A shock as large as 2022, less broad

The South African Reserve Bank's Special Occasional Bulletin of Economic Notes focuses on how oil price shocks generate second-round effects, and the current bulletin specifically examines the 2026 oil price shock. The research finds the outbreak of war in the Middle East in early 2026 triggered one of the largest oil price shocks in recent decades, generating a broad-based and intense inflation response. Brent crude prices, refinery margins and South Africa's fuel prices rose more steeply in 2026 than after Russia's invasion of Ukraine, and the intensity of the inflation pickup is comparable to the 2022 episode, though the 2026 response was less widespread and less dispersed. Favorable conditions in food sectors helped contain the overall pass-through, and some broadening of inflation, largely confined to services, was already underway before the shock. m:…2755 m:…8190

The sector detail sharpens the picture. Using 389 eight-digit inflation components, the study finds pass-through strongest in food, transport and core goods consumer price components, and that oil shocks have larger and more persistent effects when they coincide with broader inflationary pressures. Consumer price components often remain elevated long after the initial fuel price shock, and inflation persistence varies across different oil shocks. The lesson for readers of the data is that the average inflation print hides a sector story: food and transport carry the shock, services were already broadening, and persistence depends on what else is happening in the economy. m:…8190 m:…3135

Expectations move first

Market pricing tells a calmer long-term story than the spot shock suggests. Oil price shocks have a greater impact on medium-term inflation pricing than on the long-term inflation outlook, and the medium-term response is driven primarily by higher estimated inflation expectations, with the inflation risk premium making only a limited contribution. Investors do not expect oil price shocks to cause a persistent deterioration in the long-term inflation outlook, and market pricing does not suggest a sustained broadening of inflationary pressures from recent shocks. The findings hold across both daily and monthly models. m:…6800

But expectations, once moved, stay moved. A 30 percent fuel price shock modeled with a structural vector autoregression leaves firms' two-year-ahead inflation expectations significantly higher under a sustained shock, with expectations persisting for eight quarters. Distinguishing between a conventional once-off shock and a sustained shock produces different responses: the pass-through from inflation expectations to inflation is larger if the shock is sustained, and the strength of the expectations channel is conditional on a firm's ability to pass on increased costs. Duration, in other words, is doing as much work as size. m:…4023

Wages lag expectations

The wage channel is where the second round stalls, at least initially. A 40 percent oil price shock leads to an immediate upward revision in wage expectations across firms, financial analysts and trade unions, with financial analysts displaying the strongest immediate response and trade unions' one-year-ahead expectations exhibiting stronger persistence. Realized wage growth, however, responds with a lag, because South Africa's collective bargaining structures and multi-year wage agreements delay the response. Survey-based wage expectations therefore provide an early signal of emerging second-round wage and inflation pressures before paychecks change. m:…3307

Put together, the bulletin describes a window rather than a verdict. Expectations revise immediately, market pricing stays anchored long-term, and realized wages lag behind multi-year agreements. The risk the research points to is a sustained shock: eight quarters of elevated expectations is long enough for the next bargaining round to catch up, which is when a first-round fuel shock becomes a second-round wage story. The policy question is what happens inside that window, not whether the initial shock was large; on size, the bulletin is clear that it was. m:…4023 m:…3307 m:…8190