The Increase in the Price of Oil and its Challenge for Government: a Case Study on Inflation

Among most important debates in economic and political circles during last two years has been the issue that how the price of energy carrier, not least petrol, can be increased, on which the government and parliament have had serious disagreement. With using such econometric techniques as VAR and ARDL, this paper tries to study what are consequences of increase in petrol for inflation and general level of prices. The results show that a ten-percent rate of growth in nominal price of petrol will lead to a 3􀌄7 percent increase in the general level of prices. Finally with using simulation in various scenarios in which the petrol price reaches to international level, it was seen that a 125 percent increase in petrol price will lead to a 23 percent increase in inflation.