Riccardo DiCecio

English

Research Papers in Economics

June 2006 MonetaryTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
D
uring April 2006 the retail price of gasoline
increased from $2.73 to $2.97 per gallon.1
Analysts sometimes play down consumers’ con-
cerns about the high prices of gas by noting that in real
terms, i.e., relative to other goods and services, gas is still
relatively cheap compared with prices in the late 1970s and
early 1980s. However, the recent increases in the prices
of oil and gas undermine this argument.
The consumer price index (CPI) for all items provides
a measure of prices of all goods and services. The Bureau
of Labor Statistics also publishes consumer price indices
for expenditure categories, including one for gasoline. The
green line in the chart tracks the real price of gasoline
since 1967, i.e., the ratio of the CPI for gasoline to the
CPI for all items. Even disregarding the September 2005
spike due to Hurricane Katrina, it is clear that gas has
become more 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 long-
run average and comparable to mid-
1980s levels.
Gasoline price inflation tracks
closely the growth rate of the price of
oil, and the price of oil in the week of
April 21 crossed the $70 per barrel
threshold.2 The high oil price is the
result of sustained world demand, at a
time when several factors restrain the
supply of oil. The world demand for
oil is fueled by sustained growth in
oil-hungry China and India, sustained
demand from the United States, and
Japan’s recovery. On the supply side,
the oil industry does not have much
spare capacity. Any disruption, due
for example to the war in Iraq, rising
tensions with Iran, civil unrest in
Nigeria, risk of expropriation of foreign
oil companies in Venezuela or Bolivia,
would be reflected immediately in
higher spot oil prices. Futures prices
suggest that the prices of oil and gasoline are likely to
remain high in the medium term.
Even if the real price of gasoline is high by historical
standards, and trending toward record levels, the trend will
have to be sustained for quite some time before U.S. con-
sumers trade in their existing stock of vehicles for smaller
and more fuel-efficient cars. The fraction of personal con-
sumption expenditures spent on gasoline (as shown by the
black line in the chart) is on the rise, but close to its histori-
cal average (3.7 percent) and much lower than the 6 percent
peak in the early 1980s.3
—Riccardo DiCecio
1 Weekly data for gasoline prices (all grades) from the Energy Information
Administration: http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm.
2 Domestic spot market price: light sweet crude oil, WTI, Cushing. Source: Wall
Street Journal/Haver Analytics.
3 See also Cashin, David and McGranahan, Leslie. “Household Energy
Expenditures, 1982-2005.” Chicago Fed Letter, June 2006, (227).
Gas-Price Inflation
research.stlouisfed.org
Real gas price (left axis)
Gas share in PCE (right axis)
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
Jan
67
Jan
69
Jan
71
Jan
73
Jan
75
Jan
77
Jan
79
Jan
81
Jan
83
Jan
85
Jan
87
Jan
89
Jan
91
Jan
93
Jan
95
Jan
97
Jan
99
Jan
01
Jan
03
Jan
05
Ratio
0
1
2
3
4
5
6
7
Percent
SOURCE: Author’s calculations.

Gas-price inflation

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Gas-price inflation

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