On the time-varying relationship between geopolitical tensions and consumer price index (CPI): a wavelet coherence approach

Purpose This study aims to contribute to the literature on geopolitical tensions (GPTs) and consumer price index (CPI) by studying their relationship across both the time and frequency space. Design/methodology/approach The time period of the study spans from January 1993 to October 2023. Bivariate wavelet coherence analysis is used to study the co-movements. Findings However, it is interesting to note that the degree of these relationships varies and swings over time periods. Although there is a strong substantial correlation between GPTs and CPI at some phases of the study period, particularly in times of various crises, it is restricted to specific timeframes only. This may be due to the effect of some external shocks, i.e. GPTs in our case. The study suggests that governments should implement comprehensive policies to address inflation during GPTs. To minimise the adverse impact of geopolitical events, governments must reduce dependence on geopolitically sensitive countries and diversify sources of suppliers and trade partners. Further, eye-opening results of this study undoubtedly urge policymakers to take into account GPTs-related indicators in their inflation projection models and monetary policy frameworks. Research limitations/implications The study suggests that governments should implement comprehensive policies to address inflation during GPTs. To minimise the adverse impact of geopolitical events, governments must reduce dependence on geopolitically sensitive countries and diversify sources of suppliers and trade partners. Further, eye-opening results of this study undoubtedly urge policymakers to take into account GPTs-related indicators in their inflation projection models and monetary policy frameworks. Originality/value The uniqueness of our study lies in unravelling the interesting connectedness between GPTs and the CPI for the 16 most geopolitically vulnerable countries with the application of wavelet coherence analysis that also considers any change in the CPI as an effect of GPTs over a given period.