Inflation effects of oil and gas prices in the UK: Symmetries and asymmetries

Abstract

The United Kingdom is among the countries experiencing a cost-of-living crisis believed to be influenced, at least in part, by the dynamics of the international oil and gas markets. To this end, this study aims to achieve to achieve two objectives. Firstly, the dynamic association between the UK's inflation and oil and gas prices is examined. Further, the study examines whether the response of the UK's inflation to energy price dynamics is (a)symmetric. This study adopts wavelet coherency to determine the dynamic co-movement between energy prices and inflation. In addition, the dynamic simulated autoregressive distributed lag model (DS-ARDL) is used to examine the dynamic response of inflation to energy price changes. The estimation results reveal a symmetric response of inflation to gas price shocks. Further, the response of inflation to oil price shocks is asymmetric. Interestingly, the effect of gas price dynamics passes more strongly to inflation than to oil price dynamics. These findings suggest that a more diversified energy mix could help prevent substantial energy price pass-through to inflationary pressures.