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Economic SYNOPSES short essays and reports on the economic issues of the day 2004 ■ Number 27 Gasoline Affordability William T. Gavin n February 1999, the average production worker in the Between 1967 and 1973, the price of gasoline was relaUnited States earned $13.28 per hour, enough to buy tively stable while wages rose, making gasoline more affordmore than 14 gallons of gasoline, which, according to able for the average worker. The 1973 oil price hike led to a Department of Energy nationwide survey, was selling at a rapid rise in gasoline prices in 1974. Afterward, gasoline $0.92 per gallon. By May 2004, the average hourly wage had costs remained relatively flat with a slight downward trend risen about 18 percent to $15.63 per hour, but the price of until the next oil price shock hit in 1979. Our index shows gasoline had risen more than 100 percent to $1.98 per gallon. that the cost of gasoline relative to a worker’s hourly wage Thus, an hour of work in May would purchase less than 8 reached a peak in March 1981, declined sharply in 1986, gallons of gasoline. Gasoline’s increased cost has led some and remained relatively stable for the next decade. There to speculate that Americans will lose their appetite for gaswas a brief spike in 1990 when Iraq occupied Kuwait, but guzzling SUVs. the price quickly settled back to the 1967 norm. February 1999, however, was the low point in the history In 1997 and 1998, falling oil prices led to a decline in of gasoline prices relative to hourly earnings. The average gasoline prices and to a peak in the affordability of gasoline worker at that time could purchase more gasoline with an in early 1999. Since then, gasoline prices have become more hour’s wage than in any month going back to 1967. Further volatile, but they have not strayed far from the affordability more, May 2004 is far from the high point in gasoline costs. level that we saw in 1967. Unless this modestly higher price In March 1981, the hourly wage was $7.28 and the price of persists and continues to rise in tandem with or faster than gasoline was about $1.30 per gallon. The Department of wages, we would not expect it to dent consumer demand Energy survey data on retail gasoline prices does not begin for SUVs. ■ until 1990, but we do have the Bureau of Labor Statistics Consumer Price Index (CPI) on the average price of gasoline. This index was 26.3 in January 1967—when the average worker was paid $2.79 per hour—and rose to 113 in March 1981. The same index was Ratio of Gasoline Price to Hourly Earnings 85.1 in February 1999 and 164.2 in May 2004. So the actual price paid at the pump was about 18 25 percent lower in 1999 than it was in 1981, 16 and the wage rate was almost twice as high. 14 The chart presents an index of the cost of 12 gasoline relative to the average hourly earnings 10 of production workers in the United States. It is 8 the ratio of the CPI index for the price of gasoline 6 divided by the average hourly wage rate. During 1967 value equals the period average 4 the past 38 years, the cost of gasoline relative to 2 the wage rate has been flat, with wide fluctuation 0 around the trend. The chart includes a trend line equal to the 1967 ratio—a time when Americans did not worry much about fuel efficiency. Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org 20 03 20 00 Ja n Ja n 19 97 19 94 Ja n 19 91 Ja n Ja n 19 88 19 85 Ja n 19 82 Ja n Ja n 19 79 19 76 Ja n 19 73 Ja n 19 70 Ja n Ja n Ja n 19 67 I
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