Influence of oil price fluctuations on inflation uncertainty
Journal of Chinese Economic and Foreign Trade Studies
ISSN: 1754-4408
Article publication date: 7 January 2025
Issue publication date: 23 January 2025
Abstract
Purpose
The purpose of this study is to achieve a comprehensive understanding of how the intricate interconnections between oil price fluctuations, supply chain disruptions and shifting demand patterns collectively shape inflation dynamics within the Chinese economy, especially during critical periods such as the Covid-19 pandemic and geopolitical events like the Russia–Ukraine conflict. The importance of assessing the impact of oil price volatility on China’s inflation becomes particularly pronounced amidst these challenging circumstances.
Design/methodology/approach
This study uses the Markov Regime-Switching generalized autoregressive conditional heteroskedasticity (MRS-GARCH) family of models under student’s t-distributions to measure the uncertainty of oil prices and the inflation rate during the period spanning from 1994 to 2023 in China.
Findings
The results indicate that the MRS-GJR-GARCH-in-mean (MRS-GARCH-M) models, when used under student’s t-distributions, exhibit superior performance in modeling the volatility of both oil prices and the inflation rate. This finding underscores the effectiveness of these models in capturing the intricacies of volatility dynamics in the context of oil prices and inflation. The study has identified compelling evidence of regime-switching behavior within the oil price market. Subsequently, the author conducted an analysis by extracting the forecastable component, which represents the expected variation, from the best-fitted models. This allowed us to isolate the time series of oil price uncertainty, representing the unforecastable component. With this unforecastable component in hand, the author proceeded to estimate the impact of oil price fluctuations on the inflation rate. To accomplish this, the author used an autoregressive distributed lag model, which enables us to explore the dynamic relationships and lags between these crucial economic variables. The study further reveals that fluctuations in oil prices exert a noteworthy and discernible influence on the inflation rate, with distinct patterns observed across different economic regimes. The findings indicate a consistent positive impact of oil prices on inflation rate uncertainty, particularly within export-oriented and import-oriented industries, under both of these economic regimes.
Originality/value
This study offers original value by analyzing the impact of crude oil price volatility on inflation in China. It provides unique insights into the relationship between energy market fluctuations and macroeconomic stability in one of the world’s largest economies. By focusing on crude oil – a critical but often overlooked component – this research enhances understanding of how energy price dynamics influence inflationary trends. The findings can inform policymakers and stakeholders about the significance of energy market stability for maintaining economic stability and guiding inflation control measures in China.
Keywords
Acknowledgements
Declaration of generative AI and AI-assisted technologies in the writing process: The author hereby declares that the author has used the services of ChatGPT solely for the purpose of verifying the grammar in his paper. The assistance provided by ChatGPT was limited to ensuring the accuracy of his writing, particularly in terms of grammar, punctuation and coherence. The author did not seek any content-related suggestions from the model; its role was solely confined to checking the grammatical aspects of his paper. The author bears full responsibility for the overall content, ideas and arguments presented in his research, and the author has not relied solely on the suggestions provided by ChatGPT.
Funding: This research was conducted without external funding.
Ethical approval: This article does not contain any studies with human or animal participants performed by any of the authors.
Availability of data and materials: Based on the reviewers’ and editor’s request.
Competing Interests: As the author of this research, I declare that there are no competing interests related to this study.
Informed consent: This article does not contain any studies with human or animal participants performed by any of the authors.
Authors’ contributions: The author conceived the research topic, influencing the oil price fluctuations on inflation uncertainty in China by using Markov Regime Switching GARCH Family Models. An extensive literature review was conducted to gather relevant information on oil price fluctuations and inflation dynamics. In addition, the author collected and analyzed data related to oil price and data on inflation volatility. Based on the research findings and insights gathered, the author took the lead in drafting the essay, ensuring clarity, coherence and depth of analysis. Critical review and revision of the initial draft were conducted by the author, incorporating constructive feedback to enhance the quality of the essay. After finalizing the revisions, the author reviewed the final version of the essay and provided approval for submission. Serving as the corresponding author, the author was responsible for communication with the journal editor and overseeing the submission process.
Citation
Aladwani, J. (2025), "Influence of oil price fluctuations on inflation uncertainty", Journal of Chinese Economic and Foreign Trade Studies, Vol. 18 No. 1, pp. 44-85. https://doi.org/10.1108/JCEFTS-06-2024-0045
Publisher
:Emerald Publishing Limited
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