Ed Dolan's Econ Blog

Latest Inflation Data Show Little Sign that Gasoline Prices are Derailing the Recovery

Recently many commentators have worried that rising gasoline prices will derail the fragile recovery of the U.S. economy. The latest inflation report from the Bureau of Labor Statistics shows little sign that any such thing is happening yet.

The headline all-items CPI for urban consumers rose at a 3.54 percent annual rate in March, down from 5.03 percent in February. (I base these rates on the unrounded CPI data supplied by the Cleveland Fed and state monthly data as annual rates.)

There are two parts to the concern that gasoline prices could harm the recovery. One is direct: Higher gasoline prices leave less money in consumer pockets for spending on other goods and services.  That was a definite concern in February, when the monthly increase in gasoline prices was a full 6 percent. The monthly rate slowed to 1.7 percent in March, still substantial but a little less alarming.

The other potential effect of higher gasoline prices is indirect: If higher gasoline prices start feeding through to cause inflation in other CPI components, then the Fed might feel a need to tighten monetary policy. That would pose a much more significant threat to the recovery.

Gasoline price could feed through to the broader CPI in one of two ways. First, gasoline itself is a cost for many firms, from delivery services to construction. Second, gasoline is an important component of the cost of living. In a tight labor market, a rising cost of living leads to higher wage demands, pushing up prices across the board. With as much slack as there still is in the U.S. labor market, that is less likely to happen.

To see whether rising gasoline prices are spilling over to the rest of the economy, we can consult various measures of underlying inflation. The best known of those is the core inflation number published by the BLS itself, which consists of the all-items CPI less food and energy. Core inflation for March came in at a 2.8 percent annual rate, up from 1.21 percent in February.

Another useful measure of underlying inflation is the 16 percent trimmed mean inflation rate from the Cleveland Fed. Instead of always subtracting food and energy from the CPI, the trimmed mean inflation rate subtracts the 8 percent of prices that increase most and the 8 percent that increase least each month, whatever they are. Trimmed mean CPI inflation for March was 2.67 percent, up from 1.33 percent in February.

The following chart shows all three measures, the all-items CPI, the core CPI, and the trimmed mean CPI. Two things stand out from the chart: First, underlying inflation, which is much less volatile than headline inflation, shows no discernible upward trend over recent months. Second, the three measures are converging, with the two measures of underlying inflation showing an unusual degree of agreement since the first of the year

The bottom line: There is little evidence yet that rising gasoline prices are feeding through to broader inflation in a way that would choke of the recovery or justify a tightening of monetary policy. Of course, the chart shows only what has happened so far; it cannot forecast future events like a war that would close key oil routes. Such an event could change the picture quickly.

Follow this link to view or download a brief slideshow with charts of all the latest CPI data.



7 Responses to “Latest Inflation Data Show Little Sign that Gasoline Prices are Derailing the Recovery”

rjsigmundApril 14th, 2012 at 12:07 pm

i dont disagree with what you've written, but you probably shouldnt limit your discussion to just the impact of gasoline on consumers…the price of oil plays into the economy in a number of ways; feedstocks for plastics, other industrial chemicals, asphalt, rubber, drugs, etc, also agricultural chemicals & diesel fuel; not to mention transportation costs for everything..

Ed Dolan EdDolanApril 14th, 2012 at 1:16 pm

You make a valid point, of course. Interestingly, though, gasoline prices have led other oil and energy prices by a substantial margin lately. Year-on-year, gasoline is up 9 percent, whereas fuel oil is up only 5.3 percent, and energy as a whole, due largely to a 9.1 percent decrease in natural gas prices, is up just 4.6 percent. Also, note that the index for transportation services, which one would thing would be especially sensitive to fuel-cost passthrough, is up just 1.4 percent y-o-y, less than the CPI as a whole.

guestApril 14th, 2012 at 4:08 pm

The real economy might beg to differ.

It seems to this writer that it is price + quantity demanded that matters. And gasoline consumption has fallen 10% since 2005.

StuApril 15th, 2012 at 1:17 pm

With gas prices though, shouldn't we be more concerned about the actual level of prices and not the growth. Sure the rate has slowed from 6% to 1.7%, but average price is back where it was in May 2011, just before we entered a market correction.

Ed Dolan EdDolanApril 15th, 2012 at 1:47 pm

Yes, you are right–both the level and the rate matter. The level matters more for the first effect–taking money out of consumers' pockets. The rate matters more for the second effect–whether the Fed will react by tightening monetary policy.

Sierra7April 15th, 2012 at 3:45 pm

Take the "L" out of BLS and you are left with you know what. The price of gasoline is cutting hugely into "discretionary spending". That' inherently inflationary to the average citizen. Not good.

SimarmataApril 16th, 2012 at 9:29 pm

How is the impact of the decrease in the gas prices, which is also an important input to the industry and also to the households? On April 12th 2012 the price of gas has been less then $US 2 per MMBtu. Could we expect a substitution effect for the price of oil in the near future?