Pain at the Pump: Rising Gasoline Prices Undermine Disinflation Narrative

Falling energy prices were a significant factor in the big decline in the Consumer Price Index (CPI) earlier this year.

Bad news: energy prices are now heading up. That means the CPI relief was almost certainly transitory.

Gasoline prices increased year-over-year this week for the first time since February 2022.

According to EIA data released on Tuesday, Sept. 5, the average national price of $3.93 per gallon was up by 1.7% from the same week in September a year ago ($3.86).

On an annual basis, CPI fell to 3% in June. The mainstream breathlessly reported that the end of price inflation was in sight. But big drops in energy prices helped bring the overall CPI down. Broadly speaking, energy prices fell by 16.7% year-on-year in June. Gasoline prices were down 26.5%.

Now, rising gasoline prices are unwinding that progress. As WolfStreet put it, “The great plunge in gasoline prices was a major factor had caused CPI to cool 12 months in a row, from +9.1% in June 2022, to +3.0% in June 2023 – the infamous and now bygone era of ‘disinflation.’”

I warned this would happen last month when I wrote, “One of the main reasons we’ve seen the big drop in CPI is due to a 50% drop in the price of oil between the summer of 2022 and April 2023. But over the last three months, oil prices have gone up about 25%. If oil prices continue this trajectory, it will put significant upward pressure on CPI in the closing months of this year. It will also put another drag on the economy.”

And this isn’t just a little upward blip in gasoline prices. The price of Brent Crude hit $90 a barrel on Sept. 5 for the first time since last November.

Peter Schiff has been tweeting about rising oil prices and warning that they will impact the Fed’s inflation fight.

#Oil is trading at its highest price since Nov. of 2022, up 33% since March. This despite the #Fed raising interest rates by 150 basis points. Higher interest rates and higher energy costs will add to the upward pressure on producer prices, which will be passed on to consumers.

— Peter Schiff (@PeterSchiff) September 1, 2023

America was founded by rugged individuals who created government to secure their rights and leave them alone. Americans today want government to violate other people's rights, steal their stuff, and give it to them. The home of the free has become the land of the freeloader.

— Peter Schiff (@PeterSchiff) July 6, 2020

We saw signs that the big drop in CPI was transitory when the headline number ticked up to 3.1% in July. And that number still reflected a big annual drop in energy prices. The energy index decreased by 12.5% for the 12 months ending in July, and gasoline prices were down 20.3% year-on-year.

August CPI still won’t reflect the big jump in gasoline prices, but we will likely notice the impact in the September data. WolfStreet noted that gasoline prices “will switch from a downward force on CPI, although a decreasing downward force, to an outright upward force on CPI.”

Some might take solace in the fact that rising gasoline prices won’t impact core CPI. But as we’ve seen, core CPI has hardly budged. And WolfStreet projects we’ll see an increase in core CPI as well.

Core CPI itself will rise even if the usual inflation suspects (services) turn out to be benign – it will rise due the base effect (the base for the year-over-year comparison being last year’s cooling), and due to the end of the odious massive adjustments to health insurance starting with the October CPI, to be released in November.”

You can read about those health insurance adjustments HERE.

National Security Advisor Jake Sullivan said that President Biden is “doing everything within his toolkit to be able to get lower prices for consumers at the gas pump.” But that toolkit is about empty.

Biden tried to mitigate soaring gasoline prices in 2022 by selling oil from the strategic reserve. But even as oil prices fell, the Biden administration never replenished those reserves.

The bottom line is oil prices are continuing to rise, taking gasoline prices up with them. This will impact the CPI moving forward. Americans are about to be smacked in the face with an ugly reality. Disinflation — cooling CPI — was transitory.

This is one of the reasons why Peter Schiff says the Fed is in a no-win situation.

I’ve been saying to take your eyes off the rearview mirror and look at everything that’s happening in the windshield. Forget about the fact that the CPI has gone down from nine to three. We’re now going back up.”