I was wondering if anyone here would be so kind as to answer this question. Tell me how increases in oil costs increases inflation? Thanks(I need to understand this for an exam tomorrow)
Can you define inflation?
Basically oil is an essential energy input into a very large number of modern processes. Any process that requires oil or energy directly will have higher costs, and so higher oil prices will tend to push this cost up. Most of the time, the higher prices will be passed on to the consumer or end users, resulting in higher prices, or inflation. Even alternatives to oil may start to go up in price, since demand for substitutes will increase.
Yeah, but the new school of thought is that oil prices are a tax on our decadent consumption based lifestyle. As oil prices go up, we consume less, causing a general deflation of prices across the board.