The price of the global crude oil keeps on increasing ever since few months back and made a new record on July 3 ago when it reaches about AS$146 a barrel. The price global crude oil has increased twice as much as per the previous year, and keeps on climbing 45 percent in the early of the year 2008, after reaching about AS$100 last year. A barrel of crude oil can produce about 50 percent, which is only about 74 liter of gasoline (fuel). The rest of the percentage was to produce other products of crude oil.
However, the current price of crude oil has reduced significantly lately since mid September this year to around $65 a barrel.
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Inflation is an economic problem. It means a gradual and constant increase of the general price level of goods and services. Inflation referred also to the rise of prices of certain end user's goods and services such as food and traveling cost without an increment of salary and payroll. The sudden plunge of currency value shows that there is inflation as well. As we all know, there is a wide variety of goods and services at one time, therefore the measurement of general price level is by using the consumer price index. In other words, the extraction of inflation rate is through the changes in the consumer price index.
Generally, a number of factors contribute to inflation; however, two of the factors are two of the basic types of inflation. Inflation may rise due to any one of the factors, or a combination of the factors.
Cost-push inflation
The simplest example is when there is a sharp increase of the world commodity - oil; all other costs of goods and service will simultaneously increase as well. Cost-push inflation is a rise in the general price level resulting from an increase in the cost of production. The same thing will happen where there is an increase in any elements of that made up a certain cost. In another example, where there is an increase in wages and pay of line workers in a certain factory, the price of what the factory produces may increase as well.
Demand-pull inflation
This type of inflation happens when there is an excess of total spending, supply of more money to the community and there will be more spending by both the people and the country. Other causes may include a rapid growth of investments as well as a cut in the government taxes.
Import inflation
A raise in imported goods such as oil, or the significant raise in currency exchange rates causes this kind of inflation. The problem starts when a country imports goods from another country that is experiencing an increase in the price of the goods. Coherently, there is going to be a superior increase in price of the goods in the country that imports them. This kind of dilemma is especially problematic for those countries that depend a lot on imported goods. Likewise, a higher exchange rate means a higher conversion price of imported goods.
The effects of inflation could be either positive or negative. Always remember that economic pattern is like a circle, sometimes up, sometimes down. That is why there is always bad and good about it.
Positive effects of inflation include:
- Encourages investment from foreign companies and firms that can lead to an increase in national productivity and new income streaming
- An increase in investment can also creates opening for new jobs and thus, reducing unemployment
- Owners of fixed assets such as houses, shop lots, land and buildings can enjoy significant earnings since the price of fixed assets will gradually increase
Negative effects of inflation include:
- General price level will increase that will eventually cause real income of households to decrease, and so will consumer's buying power
- Low income earners, creditors, and those with big saving in financial institution will suffer a loss due to the fact that inflation reduces real income
- Companies and firms of small and medium sizes, as well as those companies and firms that are less efficient in managing resources will most likely to shut down operation. The reasons are mainly because of cost-push and import inflation.
This is but a slight view or general facts of inflation that every household should know. Knowing and learning about economics impacts on our everyday life is not restricted for those who are in the economic fields, rather it should be for everybody because it obviously affects everyone.
