We investigate both the theoretical and computational aspects of using wavelet bases to perform an exact decomposition of a local field theory by spatial resolution. The decomposition admits natural volume and resolution truncations. We demonstrate that flow equation methods can be used to eliminate short-distance degrees of freedom in truncated theories. The method is tested on a free scalar field in one dimension, where the spatial derivatives couple the degrees of freedom on different scales, although the method is applicable to more complex field theories. The flow equation method is shown to decouple both distance and energy scales in this example. The response to changing the volume and resolution cutoffs and the mass is discussed.