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Inflation due to raise in Gasoline prices Essay

Oil prices will affect the global economy more than any other commodity. The dependency of oil prices on the inflation has a strong relationship. In theory this relationship is very clear. If there is any increase in the oil prices, there is a shift in the short run of aggregate supply and this will put an upward pressure on the price level. In other words a sharp raise in the oil prices will cause a significant inflationary shock and this effect will be much greater if the country is (1) a large scale importer of the oil (2) and has many industries that uses oil as an essential input for production

Researchers suggest that for every $3-4 change in the oil price/barrel will cause 0. 1% change in inflation. Gasoline is one of the products from the crude oil. The raise in the gasoline price is dependent on the raise in the price of the crude oil, but not entirely. The graph below shows the parameters on which the price of gasoline depends. Oil Price raise and inflation from 1970: Figure II shows the price of the barrel along with the CPI data starting from the year 1970 there are three

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sharp areas where a significant change in the oil prices is seen.

In 1973, due to Ramadan War or 4ht Arab Israel war (Yom Kippur War), the oil prices have raised to 213%. After 5 years prices rose again by 166% largely due to Iranian revolution. In the more recent times the oil prices raised by 116% in December 2003 when oil traded at $69. 48 a barrel. .figure-III shows the graph of the oil prices and the CPI annually rate from the year 1970 to 2005. Fig-III Source: ESI investment, weekly commentary September 7 2005. Table –I shows that for each year the inflation has reached double digits with the peak oil shown along with.

References: • “ Oil and Inflation: Then and Now,” SEI Investments, weekly commentary, September 2005. < www. seic. com/advisors/documents/Oil_and_Inflation_Then_and_Now. pdf> • “Gasoline Prices” CRS Report for congress, February 4th 2008 <http://leahy. senate. gov/issues/Gasoline/CRSGasolinePrices020808. pdf> • http://www. cato. org/pub_display. php? pub_id=6440 • http://articles. citringroup. com/Gas-Prices-and-the-Impact-of-Inflation. id. 422. htm • http://infohost. nmt. edu/~armiller/gasprices. htm •

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