In the Wake of Crisis: Investigating Causal Impact with Wavelet Analysis of Oil Prices on Inflation in G20 Countries

Abstract

This study examines the nexus between oil prices and inflation in G20 economies, addressing the critical gaps by adopting a comparative approach across three pivotal oil price downturns in 2008, 2014, and 2020 (during the COVID-19 pandemic). This study utilised monthly time series data from January 2000 to December 2023 and the Bayesian Structural Time Series (BSTS) approach for causal impact analysis. This study found that during the global financial crisis (December 2007 to June 2014), advanced economies such as Australia and the UK displayed varying degrees of negative absolute causal impact, aligning with the deflationary impact of falling oil prices. In contrast, emerging economies faced significant negative causal impacts. From June 2014 to January 2020, diverse inflation impacts were observed across G20 economies after a significant oil price decline. Advanced economies such as Australia and emerging economies such as Brazil experienced negative impacts, while others showed negligible effects. In the subsequent period from January 2020 to December 2023, amid the COVID-19 pandemic and substantial oil price decline, G20 countries exhibited varied inflation outcomes. According to the results, there were absolute positive effects, which had a direct connection to high inflation rates. However, China was exceptional, as it had a significantly negative response. According to the wavelet coherence analysis, oil prices have an uneven and asymmetrical effect on inflation. This study’s results will help policymakers understand how various economies respond to shocks related to oil prices. Notably, this study also highlights the need for policymakers to develop flexible and forward-looking policies. As a result, this study underscores the need for G20 countries to develop strategic interventions that can adapt to the varying ways oil prices influence inflation, to keep their economies stable.