Inflation, inflation uncertainty and oil price in Australia

This study examines the link between inflation and inflation uncertainty in Australia using Granger causality tests. An EGARCH model is employed to construct the inflation uncertainty. Using quarterly data this study finds that higher inflation increased inflation uncertainty for the full period and after the inflation targeting period which provides strong support of Fridman's hypothesis (1977). Using a newly constructed oil price dummy this study also found that oil prices significantly and positively influence inflation for all periods but the effect of an oil price rise on inflation has been curtailed as a consequence of adopting an inflation targeting strategy.