Inflation Is Still A Monetary Phenomenon: A Wavelet Analysis of Inflation, Oil Prices and Money Supply

ABSTRACT

I revisit the old debate on the role of ‘oil price shocks’ in stoking inflation using wavelet coherency of oil and overall price inflation as well as partial coherency of the same given changes in real money supply. While exogenous shocks can influence the nature of short-term inflation fluctuations, I find support for inflation in early 2022 being a lagged demand-driven response to massive monetary growth in 2020.

KEYWORDS:

• Inflation
• oil price shocks
• wavelet analysis

JEL CLASSIFICATION:

• E31
• E12
• C32

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ I use a slightly modified version of Aguiar-Conraria and Soares’s GWPackage, available at https://sites.google.com/site/aguiarconraria/joanasoares-wavelets/the-astoolbox.

² In Figures 2–4, time/frequency regions at which power, coherency or power coherency are statistically significant at the 5% level are highlighted with black boundaries. Significance levels were estimated using 100 surrogate simulations of fitted ARMA(4,4) models (at each grid point). Three to six month phase differences at statistically significant coherencies and partial coherencies are highlighted with bold circles.