Increase in petrol price causing inflation?

lusaka

Hi guys.

I heard a man talking on newstalk radio about how the increasing price of petrol/Oil can have an inflationary effect.

I couldnt really here him properly because the radio in my car decides to crackle every now and then so I was wondering if someone might be able to explain how an increase in price of this finite resourse can possibly cause inflation?

Thanks in advance guys!

Victor

Whut? How can you not understand this?

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Imagine I spend €1,000 per month of which €100 is on oil products. Oil is at $100 per barrel.

Because of the violence in Libya, oil increases to $120 per barrel and it now costs me €120 (for arguments sake, the exact figures would be different) to buy the same oil products. My cost of living has gone up 2%.

Separately, that 2% affects everyone else, including businesses, who will try to pass on the cost to their customers. In turn, consumers will try to look for wage increase so as to retain their standards of living. Their employers will try to pass on the cost of this wage increase to their customers, causing a vicious circle.

While 2% may not be so bad, what happens if it becomes 20%, as happened in 1973 and 1979?

andrew

Perhaps OP is confused, given inflation is generally thought of as a monetary phenomenon. However, low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply.

SBWife

Oil is an input into virtually every good in our western industrialized economy. Through transport, plastics, and fertilizer for starters. Therefore an increase in the cost of this input works through the system and results in an increase in the overall level of prices. The inflation definition of inflation is an increase in the overall level of prices.

nesf

Just think in terms of transport costs, it's the simplest example to imagine. If the price of fuel goes up then it costs more to ship everything to your local shop. This pushes up prices for things. This puts more pressure on your wage. This makes you more likely to seek a wage increase from your employer quoting cost of living increases as the reason. And so on.

When you consider that oil is used to make so, so many products (and especially the containers/packaging they come in!) you can really see how an increase in the price of oil pushes up costs across the economy.

silverharp

it could also be deflationary as it rips money out of the economy. If someone's income is fixed and it gets spent either way then consumers have to cut back on other areas of consumption so you might see "deflation" in car prices and other asset prices. Another example might be a bad crop harvest in a small farming community, its difficult to see the situation as "inflationary" even though the notional price of the product in question is going up.

nesf

silverharp wrote: »

it could also be deflationary as it rips money out of the economy. If someone's income is fixed and it gets spent either way then consumers have to cut back on other areas of consumption so you might see "deflation" in car prices and other asset prices. Another example might be a bad crop harvest in a small farming community, its difficult to see the situation as "inflationary" even though the notional price of the product in question is going up.

Agreed that it is not monetary inflation but it can set of an inflationary spiral if and only if wages are allowed to increase. Incomes in Ireland at the moment are locked down pretty tightly on the upwards side but the same cannot be said for Germany etc where there is a lot of upward pressure already on wages before this oil issue ever came up.

TheAnswer

nesf wrote: »

the same cannot be said for Germany etc where there is a lot of upward pressure already on wages before this oil issue ever came up.

And this could well trigger the interest rate hikes that the ECB have hinted at, which will affect Ireland even though we may have zero inflation (or even deflation). Oh the joys.

silverharp

nesf wrote: »

Agreed that it is not monetary inflation but it can set of an inflationary spiral if and only if wages are allowed to increase. Incomes in Ireland at the moment are locked down pretty tightly on the upwards side but the same cannot be said for Germany etc where there is a lot of upward pressure already on wages before this oil issue ever came up.

indeed but it then just becomes monetary inflation if the wage increases are not backed by productivity.
In the last 3 years oil has gone from $147 to $35 to $100+ now , those kind of price changes have very little to do with real demand and supply and for all we know oil could be at $50 by the end of the year or if we end up with $150 oil, I dont think its oil's fault. Essentially most of the time oil going up and down in price is just part of a bigger market view on commodities, the dollar and the bullishness or not of investors

FISMA

I would say that the overworked printing presses of the monetary system, specifically the dollar, is causing the price of oil to rise.

If the US decides to float a billion more dollars, why shouldn't the price of oil go up? When your currency is diluted, should it not take more of that currency to purchase the same volume of goods?

sdanseo

The incoming government would do well wiping out the moronic carbon tax. It's all very well that it brings in money to the exchequer but people need to drive and need to be able to afford to. We have better things to be worried about than carbon at the moment.

The only problem if they do is it totally undermines charging motor tax by emissions - the only remaining reason to keep doing motor tax the current way would be to prop up the motor industry.