The fuel price shock is structurally identified from a structural vector autoregression, controlling for global and domestic factors.

_{by Keletso Morwane and Rudi Steinbach}

• We estimate the impact of a 30% increase in the fuel price on the inflation expectations of firms.
• The fuel price shock is structurally identified from a structural vector autoregression, controlling for global and domestic factors.
• We find that distinguishing between a conventional once-off and sustained fuel price shock produces different responses.
• Under a sustained shock, firms’ two-year ahead inflation expectations (the monetary policy horizon) rise significantly and are more persistent, dissipating only after eight quarters.
• The implied pass-through from the response of inflation expectations to inflation, based on a stylised Phillips curve relationship, reveals that the impact on inflation is larger if the shock is sustained.
• However, the strength of the expectations channel is conditional on the firm’s ability to pass on increased costs. Firms’ ability to pass through cost increases depends