Abstract:
The volatility in the oil prices has the implications towards the macro economic variables of developed and developing
countries. Recent highs in the world oil market are causing for possible slowdowns in the economic performance of
countries. This study examines the long run / short run relationship between inflation and crude oil prices to give
some guidelines for possible economic implications. Colombo Consumer Price Index was used as the proxy for
inflation. Deductive approach has employed using the secondary data over the period from January 2008 to April
2018. Augmented Dickey Fuller Test was used to identify the stationary of the data set. Results suggested that there
is a unit root in level series and thus the first difference series of both variables were used for the analytical purposes.
Initially, to identify the long run relationship, Johansen-Juselius (1990) cointegration test was used and the results
revealed that there is a significant long run negative relationship between Colombo Consumer Price Index and crude
oil prices. Furthermore, to identify the short run relationship, Impulse Response Analysis and Variation
Decomposition Analysis were used. Results suggested that there is a short run relationship between above variables
too. Further, Impulse Response Analysis suggested that the shock of the oil prices impact to the Sri Lankan economy
through the Colombo Consumer Price Index was started after 3 months and more than 8 months goes to become to
the normal situation. The empirical findings of this study is helpful for government policy makers, financial managers,
financial analysts and other interested parties who is dealing with the Sri Lankan economy. Very recently, the
government policy makers have taken steps to revise the fuel pricing formulae on a bimonthly basis. But there want
to be a much issue if those formulae were revised on a trimonthly basis.
