Bangladesh Bank Training Academy Journal

Abstract

This study purposes to analyze the effects of the recent oil price hike (fuel prices oil) on the inflation rate in Bangladesh. The estimation process of this study utilizes the monthly secondary data from July 2013 to September 2022 available from different sources (like; Bangladesh Petroleum Corporation, World Bank) by using the VECM approach. The rate of inflation is the dependent variable in the estimation process, domestic and global oil prices are our independent variables, and the broad money supply is included as a control variable. A simple Correlation Matrix is also done to observe the connection among the variables. The result of this study indicates a statistically significant long-run relationship among domestic oil prices, broad money supply, and the inflation rate of Bangladesh, but world oil prices show statistically insignificant results. Besides, this is consistent with theory, and the short-run adjustment coefficient has a statistically significant with negative sign, implying that long-run equilibrium is stable in the presence of any short-run shocks in oil prices. In the short run, the inflation rate is extremely high when oil prices hike, and as time goes on, the inflation rate will be adjusted in the long run. This finding is informative to policymakers or experts for formulating monetary and fiscal policies as well as providing important insights for the handling of inflation.