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What is the relationship between oil prices and inflation?

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Quick Answer

There is a directional cause-and-effect relationship between the price of oil and economic inflation, according to Investopedia. When the price of oil goes up or down, inflation goes up or down in the same direction.

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What is the relationship between oil prices and inflation?
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Full Answer

Inflation moves in the same direction as oil prices primarily because the oil industry is such a major economic input, according to Investopedia. This means that oil is a crucial product to many other vital industries, including personal and commercial transportation as well as home heating. When the cost of oil leads to increased freight transportation costs, that additional cost is passed on to consumers at the grocery store, according to the U.S. Energy Information Administration.

The Chained Consumer Price Index, which is used to track changes in the cost of living in America, monitors the cost of crude oil to predict inflation in food and energy costs, according to the U.S. Energy Information Administration. Lower oil prices have an immediate and global impact on inflation, but not an identical one, according to Business Insider. For example, while the lower inflation that coincides with low oil prices causes some difficulty in the European economy, low oil prices act as a tax cut or stimulus in the American economy.

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