It’s The Cost Of Gasoline That “Drives” Inflation
At 8:30 a.m. this morning, Eastern Time, the Bureau of Labor Statistics will release the most important economic report of the month, guaranteed to be the report that has the most impact on our financial well-being. It is the announcement of last month’s change in Consumer Prices. As the cost of almost everything in our country is constantly rising, we consider this one of the best measures of inflation.
The Index was created during the dark days of World War I. While American soldiers were overseas in Europe, food shortages and transportation issues began to appear back home in America. Food prices spiked, and consumer’s income was squeezed. The Bureau of Labor Statistics recognized the problem and decided there should be some way to compensate the folks back home. They created the Food Price Index to measure the average family’s cost increase.
It’s interesting to note that merely by focusing the nation’s attention on the cost of food, it has helped farmers and regulators create the world’s most productive agricultural sector. Even with today’s high inflation, food prices remained under control until recently. And even then, much of the rise in ag prices was attributed to the rising cost of Energy, as modern mechanized farms and food transportation are significant consumers of Energy.
The original Food Price Index has changed into the current Consumer Price Index, a basket of often purchased items for the average American family. Today, the CPI, according to the BLS, is used “to adjust income eligibility levels for government assistance, federal tax brackets, federally mandated cost of living increases, private sector wage and salary increases, and consumer and commercial rent escalations.”
The CPI affects the income of hundreds of millions of Americans. However, the CPI is no mere exercise by some far-away government agency. It accurately measures how you and I spend our money. And, taken as a whole, it should be a primary way to measure the effects of public policy. After all, it began 100 years ago as a measure of increasing food prices. These results have led to changes in tax policy, agricultural policies (designed to maintain low farm prices), and government financial aid programs.
So, let’s all put on our “green eye shades” and see if we can see what may be contributing to our current high inflation. We begin in January 2021, when Joe Bide was inaugurated as the 46th President of the United States. We will use the Bureau of Labor Statistics published CPI results as our source.
BACKGROUND
For the ten years before Biden’s assuming office, the highest level of inflation was in September 2011, when inflation rose to 4.2% (monthly reading, annualized rate). From the end of 2011, inflation never again reached 4% anytime in the next nine years.
However, all that changed after the new President took over the reins. In a little over three months, inflation shot up to 4.25, and a year after that, inflation was steaming ahead at more than 9%, a level not seen in this country in 40 years. Biden must have brought some new policies that caused prices to rise exponentially.
Let’s see if we can find what was driving this inflation. And what specific policies may have contributed?
We begin with a review of Medical Costs. Were higher hospital and doctor costs driving these higher prices? Nope, medical care was not the cause. The highest jump in medical since 2021 has been 5%, only about half of inflation’s peak. Overall, services, in general, have contributed little to inflation. Neither the cost of automobiles nor clothing could be considered a driver of overall higher prices.
If you review all the different categories of expenses for the CPI, you find that only one type rose so much that it pushed inflation. And that category in Energy, or more specifically, gasoline prices. Eight different times since 2021, gasoline costs have risen by 47% or more.
That ought to get our attention. The jump in gas prices has been so far from the average that they’ve put a dent in all our wallets. I remember last fall when the cost to fill up my SUV was more than $100. The first time that ever happened. Granted, it has a large gas tank, at 20 gallons, but when the gas price reached $5, the station said, pay me a “C” Note.
So profound has this rise in gasoline prices been that if we took away the jump in gas prices, you would immediately reduce inflation by at least 2 1/2%.
What’s worrying consumers today is the recent rise in the cost of gasoline and its derivative oil. In less than three months, West Texas Intermediate Oil has risen from less than $70/barrel to nearly $90/Barrel, a rise of almost 30%, something that’s sure to hit us square in the pocketbook.
Perhaps we need less monetary tightening and, instead, a better energy policy in our fight with inflation.
Follow me here on Medium for more stories from the ValueSide.
