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Economic SYNOPSES short essays and reports on the economic issues of the day 2006 ■ Number 13 Gas-Price Inflation Riccardo DiCecio uring April 2006 the retail price of gasoline prices. Futures prices suggest that the prices of oil and increased from $2.73 to $2.97 per gallon.1 Analysts gasoline are likely to remain high in the medium term. sometimes play down consumers’ concerns about Even if the real price of gasoline is high by historical the high prices of gas by noting that in real terms, i.e., relastandards, and trending toward record levels, the trend tive to other goods and services, gas is still relatively cheap will have to be sustained for quite some time before U.S. compared with prices in the late 1970s and early 1980s. consumers trade in their existing stock of vehicles for However, the recent increases in the prices of oil and gas smaller and more fuel-efficient cars. The fraction of personal undermine this argument. consumption expenditures spent on gasoline (as shown by The consumer price index (CPI) for all items provides the black line in the chart) is on the rise, but close to its a measure of prices of all goods and services. The Bureau historical average (3.7 percent) and much lower than the 6 of Labor Statistics also publishes consumer price indices percent peak in the early 1980s.3 ■ for expenditure categories, including one for gasoline. The 1 Weekly data for gasoline prices (all grades) from the Energy Information green line in the chart tracks the real price of gasoline since Administration: http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm. 1967, i.e., the ratio of the CPI for gasoline to the CPI for 2 Domestic spot market price: light sweet crude oil, WTI, Cushing. Source: Wall all items. Even disregarding the September 2005 spike due Street Journal/Haver Analytics. to Hurricane Katrina, it is clear that gas has become more 3 See also Cashin, David and McGranahan, Leslie. “Household Energy Expenditures, 1982-2005.” Chicago Fed Letter, June 2006, (227). and more expensive with respect to other goods since 2003. The real gas price has not yet reached record high levels, but it is above the longRatio Percent run average and comparable to mid-1980s 7 1.3 levels. Gasoline price inflation tracks closely 1.2 6 the growth rate of the price of oil, and the price of oil in the week of April 21 crossed Gas share in PCE (right axis) 1.1 5 the $70 per barrel threshold.2 The high oil 1 price is the result of sustained world 4 demand, at a time when several factors 0.9 restrain the supply of oil. The world demand 3 for oil is fueled by sustained growth in oil0.8 hungry China and India, sustained demand 2 from the United States, and Japan’s recovery. 0.7 Real gas price (left axis) On the supply side, the oil industry does 1 0.6 not have much spare capacity. Any disruption, due for example to the war in Iraq, 0 0.5 rising tensions with Iran, civil unrest in Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 Nigeria, risk of expropriation of foreign oil SOURCE: Author’s calculations. companies in Venezuela or Bolivia, would be reflected immediately in higher spot oil D Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org
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