Impact of crude oil price fluctuations on consumer price index in Kenya

Abstract

This study tries to determine the impact of crude oil price fluctuations on the Consumer Price Index, CPI in Kenya, using the monthly data  from 2012M1-2023M3. The Augmented Dickey-Fuller unit root test used in the analysis to test for stationarity for the series indicated  that CPI and significant types of Crude oil (Kerosene, Diesel, and Super petrol) were non-stationary. The empirical analysis is  carried out using cointegration by applying Johansen’s multivariate approach, which reveals that not more than one cointegrating  relationship holds between oil prices and CPI in Kenya. The analysis using VECM further shows that the series deviation from equilibrium  to disequilibrium cannot be corrected back to equilibrium in the long run. The impulse response functions reveal that oil price shocks  positively affect CPI in Kenya. As expected, the forecasted values continue to exhibit an increasing trend in the central oil type prices and  CPI values in Kenya. The Jacque-Bera test for normality, ARCH-LM test for Homoscedasticity, and Portmanteau test for serial correlation  were used to test for the adequacy of the Model.