Examining the Impact of Oil Prices and Economic Policy Uncertainty on Inflation: A Novel Wavelet Quantile Transformation Approach

This study examines the effects of oil prices and economic policy uncertainty on inflation over the period 2008–2023. The main objective of the research is to analyze the complex dynamics among these variables across different time horizons and under varying market conditions (such as bullish and bearish markets). The study employs the wavelet quantile transformation method to simultaneously investigate the effects of oil prices and economic policy uncertainty on the distribution of inflation across different time horizons. The use of quantile transformation allows for a more precise analysis of the relationships among variables across time horizons and shows that the impacts of economic and policy shocks on inflation differ across quantiles. The results indicate that oil prices have a statistically significant effect on inflation; however, this effect varies across short-term, medium-term, and long-term horizons. The impact of oil prices on inflation is stronger in the short term and diminishes over time. Economic policy uncertainty also has a substantial effect on inflation, particularly under conditions of high policy-related volatility. This effect is especially pronounced at higher quantiles of the inflation distribution (i.e., when inflation is at elevated levels). The application of the wavelet quantile transformation enables researchers to analyze the relationships among variables more accurately across different time horizons and under different market conditions. This method demonstrates that the effects of economic and policy shocks on inflation differ across quantiles. The findings of this study assist economic policymakers in gaining a deeper understanding of the effects of key variables such as oil prices and economic policy uncertainty on inflation, enabling them to adopt more effective strategies in addressing these challenges.