Analysing the Asymmetric Effect of Oil Price Shock on Inflationary at the Aggregate and Disaggregated Levels in Malaysia

Oil price shock creates uncertainty about future oil price movement, making complicated for policymakers to protect economic welfare. A sharp increase in the price of oil raises production costs, which raises consumer prices and thus leads to inflation. High inflation can reduce consumer surplus and economic welfare in an economy. This study examines the asymmetric effect of oil price shock on inflationary at aggregate and disaggregated levels in Malaysia using an open-economy structural vector autoregressive (VAR) model. The impulse response function analysis reveals that the impact of an oil price shock on aggregate price, food index and transport and communication index is large and positive, regardless of whether the shock is positive or negative. The responses for other consumer price index (CPI) sub-groups differed in response to positive and negative oil price shocks, confirming the existence of an asymmetric effect of disaggregated price levels. The asymmetric impact of real oil price changes (both positive and negative) on the transport and communication index is the largest and most persistent among the CPI sub-groups as confirmed by forecasting error variance decomposition. In addition, asymmetric changes in real oil price exert inflationary pressure on aggregate and disaggregated price levels in Malaysia.