The Comovement between Fuel Prices and the General Price level in Australia

This paper examines the relationship between the general price level and the relative price of fuel by measuring correlation from VAR forecast errors. The results suggest a significant positive correlation between quarterly changes in the relative price of fuel and the CPI, at least in the short to medium term from two to four years. The finding has important implications for measuring the long-term trend in inflation as relative price changes in fuel contain important information about future inflation.