Oil volatility–inflation pass through in China: Evidence from wavelet analysis

Abstract

The increasing gap between China’s oil demand and its own production capacity leads to greater dependence on imported oil. This paper investigates that how does the growing dependence would change the dynamic relationship between oil price fluctuation and inflation in China by applying an extended wavelet analysis framework. The results indicate that there is a positive oil volatility–inflation pass through in the short term, with occasional feedback from inflation to oil price. And in the medium and long term, the pass through persists over time, which differ from previous studies based on data from other countries. The findings also embody consistent causality from oil price fluctuation to inflation and significant positive correlation. In general, our results justify the theory of cost-push inflation and fit the fact that China has been experiencing significant economic transitions.

Keywords

• Oil volatility
• Inflation
• Pass through
• Wavelet analysis
• Time–frequency​ domain