Friday, December 18, 2009

How can high oil prices cause inflation?

Because oil is used to make plastic, which is used in many goods. Not only plastic, but trasportation, luricants etc. Oil is a scare resource, demand is greater than supply, so equilibrium is high, meaning a high price. The gradual increase of the prices of goods and services is termed as inflation. Therefore, ultimately, high oil prices do indeed cause inflation.How can high oil prices cause inflation?
Higher oil prices directly affect the cost of transporting goods. Since nearly all goods get transported several times on the way to the end consumer, higher oil prices affect the prices of a wide array of products. The CPI ( Consumer Prices Index) which measures the prices of many products and commodities is used to gauge inflation. As the prices of goods increase to offset the losses of the company from higher transportation costs, the CPI (inflation) also increases.How can high oil prices cause inflation?
Higher prices for anything is defined as inflation - it is a basic definition.

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