Reference no: EM132334346

Macroeconomics Article

This article is about the correlation between gas prices and inflation Canadian economy. Inflation refers to the rise in the overall price level. Therefore, for inflation to occur the prices of commodities such as clothes, food, fuel and transport must proliferate. According to the writer of the articles, gas prices have escalatedthe rate of inflation in Canada to the utmost level. According to the Bank of Canada, inflation will rise to 2.5 percent due to factors such as higher gas prices but will settle back to 2 percent late next year.

Furthermore, the articlehas also proposed how the Canadian government can prevent inflation from rising even higher in the future. For instance, it has cited that the Central Bank of Canada should hike rates of interest to curb the increasing rate of inflation. In fact, earlier this summer, the bank proliferated its interest rate to 1.5 percent. Evidently, inflation has affected the Canadian dollar in relation to the US dollar. For example, after the rise in inflation earlier last month, the Canadian dollar hiked to 76.50 US cents.

There are two types of inflation, which cause an increase in the price level. The first category is demand-pull inflation. This type of inflation arises when the total demand is greater than the production and supply capacity of the economy. In other words, it means that consumers in the economy have more money to spend on gas than usual. They demand more gas. Nonetheless, the supply of gas remains relatively constant in the short run. On the other hand, cost-push inflation occurs when the prices of factors of production increase. Factors of production in gas supply include wages, raw materials, fuel, and power. Consequently, it leads to increased cost of production and supply, affecting the quantity supplied in the economy. Precisely, the supply reduces and the prices rise.

Lastly, inflation and the price of gas and other crude oil products are usually correlated. In other words, they are connected in a cause-and-effect relationship. Therefore, as the price of gas and oil products shoot, inflation follows in the same direction. This is because oil is a major input in the world economy. Other components that inflation effectincludes the increased cost of air transport, the high cost of telephone services, increased the cost of food and mortgage interests rising to 5.2 percent.

Reference

Gas prices drive Canada's inflation rate in July to the highest point since 2011. (2018, August 17). Retrieved from https://globalnews.ca/news/4393383/gas-prices-canada-inflation-rate-highest-since-2011/