Inflation, oil prices, and economic activity in recent crisis: Evidence from the UK

Abstract

This study examines the link between inflation and the macroeconomy such as output, trade balance and unemployment as reflected through crude oil prices. Using monthly data from the UK spanning January 2010 to June 2022, we apply a combination of three analyses including the VAR model, time-varying VAR analysis, and time-varying panel model with robustness. The results reveal that in the event of inflation shocks the other economic indicators decrease initially. However, Brent crude oil shocks are the quickest in responding to surging inflation compared to other proxies, rebounding to a positive level in only one month. Furthermore, the impact of inflation shocks is strong in the first quarter but diminishes in the long run. This information can be used to inform and assist policymakers to develop policies that mitigate the negative effects of inflation in the short term. Our findings also have important implications for businesses operating in the UK in making strategic decisions.