CPI Gasoline Analysis
Gasoline is a commodity that is impacted by many economic and noneconomic forces. Gas constantly changes prices and this is due to a variety of economic factors which create inflation and deflation for this commodity. The two largest factors impacting the price of gas is taxes and inflation which are intrinsically linked through demand for gas. This can be seen in the examination of the CPI.
The CPI for gasoline starting in 1990, shows a relatively stable rate for gas which remained this way until 1999 (FRED, 2017). The prices of gas in 1999 began to significantly increase as a result of a number of factors but the relationship oil and inflation began to change dramatically as the price of gas would increase 5 times between 1999 and 2005 (FRED, 2017). Simultaneously, CPI only rose from 164.30 in 1999 to 196.80 in 2005. Normally, changes in prices are accompnaied by changes in inflation but this relationship is not as strong when it comes to gas. The reason that this relationship does not hold true to the same degree that it does with other products is due to the relationship between inflation and fuel cost. Inflation and fuel cost is a cause and effect relationship that has been weakened over time due to the large growing dependency of the United States on gasoline. Because fuel is a critical need in the United States, it tends to drive up inflation when prices increase, but in recent years this has not occurred due to the strong control that the government has exercised since the Great Recession.
Inflation has gone down since its highest point in 2008. While many people attribute the recession as the key factor in the increase in inflation during this time, this was not the case. There were shortages that occurred as the result of production losses abroad which drove up the CPI during this time (Ajmera, Kook, & Crilley, 2012). This change in inflation was the direct result of increased production costs (Ajmera, Kook, & Crilley, 2012). These changes can be seen in the CPI increase between 2003 and 2008 (CPI rose 19.71%) (Ajmera, Kook, & Crilley, 2012) (FRED, 2017). There were many factors that impacted the CPI and cost of fuel including natural disasters, shortages, and political issues both abroad and in the US:
Higher oil and gas prices therefore accounted for 37.48 percent of the percent change in the all-items CPI … Rising oil and gas prices accounted for a substantial amount of the inflation both over the entire period from 2003 to 2008 and in 2008. These prices are expected to continue impacting the cost of fuel (Ajmera, Kook, & Crilley, 2012).
The major issue with the cost of fuel is that it is a necessity for most people. The demand for gas makes the supply and demand relationship for gas somewhat inelastic. This means that the price of fuel has little effect on the supply or demand since it is needed. From a personal perspective the cost of fuel appears to be arbitrary because it is constantly shifting up and down an these shifts are difficult to associate with causes. For example, when there are disasters and prices spike, many people assume that station owners are profiting by simply using the disaster as a reason to increase cost. While some elements of price gouging and profiteering may be true, the reality is that disasters often disrupt supply lines causing shortages. Research shows that gas prices are inelastic to a large degree:
Both Espey and Goodwin et al. discovered that the elasticity for gasoline is relatively inelastic with both groups estimating a short-run Ed roughly equal to -.26 and about twice that for the long run. This number indicates that a 10% increase in fuel prices will cause about a 2.5% reduction in the consumption of fuel within a year and more than a 5% decrease over longer periods (Gratch, 2015).
This inelastic nature of fuel creates many issues for the consumer because it is difficult to plan for increases or to know when fuel costs are going to rise. Fuel prices tend to impact my family in a negative manner because everyone commutes to work and we need to pay for gas no matter the cost. This is disruptive to household budgeting efforts when prices begin to rise. As a result of this issue the only real planning that can be made is to purchase vehicles that are fuel efficient. This has helped to some degree.
From the stand point of companies and managers, there is no real means to use CPI with fuel costs to directly determine proper wages and benefits. Fuel CPI tends to be rather unpredictable in recent years and using other factors such as overall CPI may be more beneficial to the determining of wages.
Ajmera, R., Kook, N., & Crilley, J. (2012). Unit Impact of commodity price movements on CPI inflation. Retrieved from U.S. Department of Labor – Bureau of Labor Statistics
FRED. (2017). Consumer Price Index for All Urban Consumers: Gasoline (all types). Retrieved from Federal Reserve Bank of St. Louis
Gratch, D. (2015). The Price of Gasoline in the United States and Abroad. Stanford University. Stanford University Press.