After an oil price shock was impacted upon the other five variables in the model, many interesting results were found.

I have already demonstrated that oil Granger causes inflation, therefore it is expected that after a shock was applied to the oil price statistic, inflation would respond. The middle right graph from Fig. 4.4 depicts the response of inflation to an oil price shock, with the analytical two-standard-error bands. Certain characteristics of the response should be noted as they are crucial in understanding the problem of the project. Firstly, for the first four quarters, it can be seen that after a shock, the inflation rate rises rather steeply by approx. 0.5. This means that in the immediate aftermath of an oil price shock, the UK inflation rate will respond by increasing. The level of inflation reaches the maximum point at the third quarter. This shows that in the short run, the impact of an oil price shock to inflation is significantly negative. Secondly, inflation then calms and reduces through the next 8-10 quarters as the shock has been absorbed by the economy, and when the oil price decreases and stabilises, inflation decreases commensurately.Finally, it can be seen that inflation will return to its normal trend pattern 20 quarters after the initial shock. Whilst this may seem surprising, the result supports the business cycle theory, that over a five year period, an economy is likely to see peaks and troughs in its macroeconomic variables. This result follows economic theory, that due to its price inelasticity (Cooper 2003) and importance to the UK economy, should a shock be impacted upon oil prices, consumption of oil will not significantly drop, resulting in a form of cost-push inflation.