Inflation synchronization among the G7 and China: The important role of oil inflation

Abstract

We investigate the interconnectedness between CPI inflation in the G7 countries and China and oil price inflation over the period 1987M6-2020M6. To this end, we employ the multivariate DECO-GARCH model and both time-domain and frequency-domain spillover methods to achieve the objectives. We find that there is a reasonably high degree of integration between the CPI inflation rates and the oil price inflation. This relationship is not only time-varying, but also has been rising over time and, remarkably so, during the oil crises and financial stress episodes. We also show that the oil price inflation is a crucial transmitter of spillovers to CPI inflation. The largest gross directional spillovers to other CPI inflation rates accrue to the US, followed by France, while the lowest accrue to China. Additionally, the oil price inflation influences the CPI inflation over the short- and medium-terms and, to a lesser extent, in the long-term. Finally, different measures of the oil price inflation are net transmitters of inflation spillovers that are strongly interconnected among themselves. They transmit strong spillovers to the US inflation, which, in turn, has a mild influence on the path of inflation in several of the countries under consideration.