Oil & Gas is touted the mother of inflation that is sweeping around the world.
Since crude oil is a significant economic input, an increase in oil prices affects inflation, which tracks the total rate of price growth across the economy.
Inflation, calculated by the yearly increase in the U.S. Consumer Price Index (CPI), reached a 40-year high in March 2022, amid COVID-19 supply interruptions.
Crude oil prices reached their highest level in ten years due to sanctions placed on Russia following its invasion of Ukraine.
By considering the index weighting of around 4% for energy commodities, energy made up about 7.3 percent of the CPI as of December 2021.
Because crude oil is a crucial component of the petrochemicals needed to produce plastic, rising oil prices also have an indirect influence on inflation in addition to their direct impact.
Therefore, more expensive oil tends to drive up the cost of many items manufactured of plastic.
The cost of oil accounts for around half of the retail price of gasoline, and consumer prices also take transportation expenses, such as fuel prices, into consideration.
The core CPI index, which excludes energy and food costs due to their higher volatility, reflects the indirect inflationary effects of crude oil prices.
Higher inflation tends to raise oil prices in the short term.
In the longer run, oil prices may decrease as a result of the Federal Reserve increasing interest rates and slowing economic growth in order to contain inflation.
While the price of oil has traditionally been connected with inflation, that relationship has grown less pronounced since the 1970s.
This association has probably loosened as a result of the expansion of the service industry, which consumes less energy than manufacturing.
Oil prices have historically had a greater impact on the cost of goods than services because it is a crucial component of manufacturing and a significant cost in shipping.
This helps to explain why there is a strong correlation between crude and PPI and a relatively weak correlation between crude and CPI.
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