1. Fuel is a commodity used in the production of any commodity directly or indirectly. Fuel can be used directly as raw material and indirectly for transporting goods. Therefore rise in fuel price means, increase in cost of production of all the commodities and hence it creates inflation.
2. The price level rises because of increasing cost of production. Rise in prices of factors of production like wage cost, rent etc. are the cost push factors.
3. Effect of inflation:
1. Fixed income group in the economy: Real income means purchasing power of the money income. Fixed income group includes pensioners, Government servants etc. who get a fixed money income. This class is worst affected by inflation because the purchasing power of their fixed income goes on decreasing with rising prices.
2. Distribution of income: The profit incomes of the businessmen entrepreneurs increase during inflation, while the real income of the common salaried people declines. Thus, the pattern of income distribution in the economy or society becomes unequal.
3. Capital Formation: A majority of the governments of under developed countries have to take to deficit financing so as to make up for the growing expenditure on economic development. As a result, there is a lot of increase in prices.
4. Producers: This class gains by inflation because: (1) They produce more to meet rising demand (2) They stock large quantity of raw material bought at pre-inflation prices (3) Wages increases less than the prices. (4) Those entrepreneurs and traders who repay the loans borrowed earlier stand to gain.
