OIL PRICES AND HEADLINE AND CORE INFLATION DYNAMICS IN SAUDI ARABIA

Abstract

This study analyzes the relationship between oil prices and inflation in Saudi Arabia from 2000 to 2022 using Johansen cointegration and VECM methods. Results show a long-term equilibrium for both headline and core inflation, with significant negative error correction vectors. Short-term effects of oil prices are insignificant but imports positively impact headline inflation. Long-term, oil prices and GDP significantly affect headline inflation, while their impact on core inflation is transitory. Causality tests indicate imports and oil prices influence both inflation indices. The study recommends diversifying from fossil fuels to enhance export-led growth and manage core inflation.