Inflation and its Impact on Gas Prices
Inflation and its Impact on Gas Prices
The American economy has experienced several changes over the past two and a half decades. Since the 1990s, the economy has experienced rising and dropping levels of inflation, which has, in turn, resulted in uneven changes in the prices of different commodities including gas. The average gas price in 1990 was $1 per gallon and has been rising since then with the highest price of $3.53 per gallon being noted in 2011 (Avro, 2012). In between the years, the price has dropped but has not gotten to levels of as low as $1 per gallon. However, during the same period, inflation levels have been falling with the lowest rates of –0.4% being experienced in 2009 (The Statistics Portal, 2015). It should, however, be noted that people had different purchasing powers at the different times. To understand the impact of inflation properly, economists have employed inflation-adjusted prices to compare the oil prices with the current value of the dollar. These statistics have resulted in a better understanding of how inflation influences gasoline prices at different times. It is also important to understand how oil prices affect inflation as the two have been explained to be interrelated.
One of the ways to show how inflation rates have affected gas prices is the use of inflation-adjusted data. Economists employ inflation adjusted data to show how prices of different commodities have risen or dropped based on the consumer price index. Since the early 1900s, the price of gas has been experienced varied changes with an all-time low being in the 1930s (Avro, 2012). The use of inflation-adjusted prices allows economists to equate these oil prices with the average consumer price index at the particular time. Between the year 1990 and 2015, the inflation-adjusted price of gas has drastic increase and decrease. Using the inflation attuned information showed 1990 to have experienced relatively higher gasoline costs in comparison to the consumer price index (Avro, 2012). The same year experienced very high inflation levels, which suggests inflation affects the relative gas prices. Based on inflation data, the lowest oil prices of $1.44 per gallon were noted to have been in 1998 (Avro, 2012). At the same year, the inflation rates were at the lowest with inflation being 1.6%, which was a drop from the 2.3% inflation rate experienced in 1997 (The Statistics Portal, 2015).
The use of inflation attuned statistics also showed a sharp decrease in the gas prices in 2009, the same year when the recession hit America. In 2009, the inflation rates hit an all-time low of -0.4, which was reflected by a drop in gas prices (The Statistics Portal, 2015). In the years when inflation levels were reported to be the highest, the inflation-adjusted oil prices were also noted to be higher. The year 2008 and 2011 saw higher inflation levels as compared to the other years. The inflation attuned gas prices for these two years were noted to be highest in history with the cost of gas being 3.57 per gallon (Avro, 2012).
Impact of Oil Prices on Inflation
It is common notion that oil prices significantly influence inflation. This perspective is mainly due to the 1970 events, which saw inflation levels shoot to double digits after the oil crisis of 1979 (Neely, 2015). An increase in oil prices resulted in a rise in the prices of energy-associated commodities including gasoline. This increase in the price of gasoline, in turn, led to a rise in the cost of transportation. The oil crisis in the 1970s led to a drastic increase in inflation levels. The 1990s began with the Gulf oil crisis, which saw an increase in the average price of oil. This did not, however, result in a higher than average inflation levels. The change in time had seen a change in the consumer price index; therefore, the change in oil prices had little impact on inflation levels. Cavallo (2008) however explained changes in oil prices to result in temporary inflation. The changes in oil prices were also explained to be a forecast of future inflation levels (Cavallo, 2008). The high investment in natural and renewable energy has reduced the overreliance on crude oil; therefore reducing the correlation between inflation and oil prices.
Inflation is the average increase in the overall cost of goods and services. At different times in history, America has experienced different levels of inflation, which has also seen varied changes in oil and gas prices. The rate of inflation and the price of gas have been related with an increase in either resulting in a change in the other. It is, however, hard to understand this relationship due to changes in the consumer price index. The use of inflation altered price allows one to understand clearly the relationship between inflation and the average gas prices. As noted in the paper, years that had high inflation levels experienced a relative rise in oil prices based on the consumer price index at the time; therefore a conclusion that inflation rates affect the relative gas prices at different times.
Avro, S. R. (2012). How High Have Gas Prices Risen Over the Years? Retrieved from Energy Trends Insider: http://www.energytrendsinsider.com/2012/02/27/how-high-have-gas-prices-risen-over-the-years/
Cavallo, M. (2008, October). Oil Prices and Inflation. Retrieved from Federal Reserve Bank of San Francisco: http://www.frbsf.org/economic-research/publications/economic-letter/2008/october/oil-prices-inflation/
Neely, C. J. (2015). How Much Do Oil Prices Affect Inflation? Retrieved from Economic Synopses: https://research.stlouisfed.org/publications/economic-synopses/2015/05/11/how-much-do-oil-prices-affect-inflation/
The Statistics Portal. (2015). Annual Inflation Rate in the United States from 1990 to 2015. Retrieved from The Statistics Portal: http://www.statista.com/statistics/191077/inflation-rate-in-the-usa-since-1990/