We present a general scheme based on nonlinear response theory to calculate the expansion of correlation functions such as the pair-correlation function or the exchange-correlation hole of an inhomogeneous manyparticle system in terms of density derivatives of arbitrary order. We further derive a consistency condition that is necessary for the existence of the gradient expansion. This condition is used to carry out an infinite summation of terms involving response functions up to infinite order from which it follows that the coefficient functions of the gradient expansion can be expressed in terms of the local density profile rather than the background density around which the expansion is carried out. We apply the method to the calculation of the gradient expansion of the one-particle density matrix to second order in the density gradients and recover in an alternative manner the result of Gross and Dreizler [Gross and Dreizler, Z. Phys. A 302, 103 (1981)], which was derived using the Kirzhnits method. The nonlinear response method is more general and avoids the turning point problem of the Kirzhnits expansion. We further give a description of the exchange hole in momentum space and confirm the wave vector analysis of Langreth and Perdew [Langreth and Perdew, Phys. Rev. B 21, 5469 (1980)] for this case. This is used to derive that the second-order gradient expansion of the system averaged exchange hole satisfies the hole sum rule and to calculate the gradient coefficient of the exchange energy without the need to regularize divergent integrals.