The other main way to increase inflation is by increasing the cost of the components of things. For instance, if you’re Apple and the cost of most of the materials for making iPhones increase, you’re going to have to raise your prices if you want to stay in business and keep making money.
There is one area of the economy that is often ignored by the general public but that is one of the biggest driver of cost-based inflation: commodities. Within commodities, there are two that are far and away the largest contributors: oil and natural gas.
It’s easy to underestimate how much of an impact oil and gas have on our society. We tend to think about oil as being used to make the gas/diesel for our cars and to heat our homes, and that’s about it in terms of the impact that it’s price has on our life. With natural gas, you might think of your gas stove and your gas heating system for your home, and that’s probably about it. However, while those may be the main things that directly affect us, that is only the tip of the iceberg.
When oil and gas prices go up, it creates a huge ripple effect on the economy because oil and gas are used in at least one stage of virtually anything that you spend money on. For instance, let’s say that you want to buy some fruit from the grocery store. In order for that fruit to get from a seed to the grocery store, it has to be planted by a farmer, who is probably using tractors, which use diesel. That farmer also has to fertilize the field, and that fertilizer is made using natural gas. The farmer probably will spray pesticides and tend to the crops at different points (more diesel and some aviation fuel for the crop duster), and then will use even more diesel to harvest the crops. Once they’re harvested, they get packed up into containers (that are probably made of plastic, which is made with oil), and then put onto a truck. If that fruit is ripe enough, it is then shipped to the grocery store, and the truck uses diesel for that. If it isn’t ripe enough, it is artificially ripened using one of the components of natural gas. The grocery store owner then has to use either oil or natural gas to heat the store, and pay for electricity that is likely produced by burning coal, oil, or natural gas. By the time you get your fruit, oil and gas have already had a tremendous impact on it.
This impact doesn’t only apply to groceries either. Virtually anything that requires any sort of manufacturing requires a substantial amount of oil and gas to power the manufacturing process. If you want to build a car, you need the wiring, rubber, different types of metal, paint, plastic, and many other components. Each of these these components requires fossil fuels for the production process, and then even more fuel to assemble them into a car.
Almost anything that requires electricity also requires tremendous amounts of coal, oil, and gas, so even things that are internet-based are susceptible to commodity prices. According to a report by Ericcson, each GB of data that is downloaded via a mobile network uses roughly 2 kWh of electricity. They also estimate that global monthly mobile data usage is roughly 65 EB per month (65 billion GB). Using these estimates, a 0.5¢ increase per kWh of electricity would translate to an added $650 million of electricity costs per month for mobile carriers, or $7.8 billion per year. Now, these numbers are very rough estimates, and electricity usage per GB of data has likely decreased over the past few years. The point, however, remains; when fossil fuel prices go up, so do electricity prices. When the cost of electricity goes up, so does the cost of the internet.
As you can see, the world is powered by fossil fuels, so when their prices go up, the world feels the impact of the rising prices.
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