Oil, Risk, and Price Pressures before Putin/Ukraine – using the Hamilton Filter

Reader Erik Poole suggests using the Hamilton filter instead of the Hodrick-Prescott filter, in assessing how much the CPI deviated from trend (recall, i noted that the CPI rose 2% vs trend at the same time as oil prices were elevated, before and after the expanded Russian invasion of Ukraine). I am (more than) happy to oblige.

Figure 1: Oil price (Brent), $/bbl (blue, left scale), and CPI deviation from trend (Hamilton filter) (tan, right scale). NBER defined peak-to-trough recession dates shaded gray. Source: EIA, BLS via FRED, NBER, and author’s calculations.

I implemented the Hamilton filter with h=24, p=12. The HP cyclical component rose 2.1% from November 2011 to June 2022, while the Hamilton filter indicates a 7.7% increase. This is in line with my conjecture that in general, estimated cyclical components were larger for most typical US macro series.

Obviously, correlation is not causation; in particular, a joint factor is increased oil prices is associated with increased aggregate demand, which itself (in the context of fixed or depressed aggregate supply) would raise prices. However, I think all would agree at least a large share of the energy component of CPI-all is associated with cost-push inflationary pressures.

correlation
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