A Cointegration Time Series Analysis of Long Run Relationship between Petroleum Product Prices and Inflation

This study focuses on finding the long run relationship between different income group-based index numbers, i.e., lower, higher, and combined/average income groups with that of petroleum products prices, namely petrol and high-speed diesel (HSD). Another focus of the study is estimation of an equation to investigate the effect of petrol and HSD prices on different income groups, and to assess which income group is affected more by increase in prices of petroleum products for the period 1991-2021. Correlogram, Augmented Dickey Fuller and Phillips-Perron tests are used to assess the nature of stationarity after which Johansen’s cointegration test is used to assess the long run equilibrium relation. The long run cointegration equation helps in assessing the strength of petrol and HSD on increasing the consumer price index for different income groups. From the study, it is found that for lower income group HSD causes more change in the index number than that of petrol prices while for higher income group families the case is reverse. Whereas for combined income group high speed diesel revealed more changes than that of petrol.