Fuel Prices Critical to Slowing Inflation

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• Oil prices and strikes could boost inflation in the coming year.
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Based on the consumer price index (CPI), inflation in the United States has slowed considerably in the past three years. In June 2022, the year-over-year rate was 9.1%. Last month, it was 2.4%. The recent drop has been driven largely by falling energy prices. In September, the CPI category of “energy” dropped 6.1%.

The energy drop was, in turn, driven by a 15.3% decline in gasoline (all types) and a 22.4% decline in fuel oil. Given the millions of homes heated by fuel oil and the tens of millions of cars on American roads, the effects of these drops cannot be overstated.

In the final quarter of 2023, there were 233 million vehicles on American roads. While a limited number of these are EVs, the vast majority run on gasoline and diesel. For many U.S. households, gas and fuel oil are among the few things that determine discretionary income. Others are housing costs and food. Consumer spending is about two-thirds of gross domestic product (GDP), and disposable income, another key to GDP, is a large portion of that metric.

Economists are incredibly anxious about high oil prices. The Russian invasion of Ukraine in March 2022 pushed crude prices to over $100 a barrel on worries about oil supply availability. This, in turn, moved the average cost of a gallon of regular gas close to $5. Anxiety about inflation and the recession that would follow quickly began to grow.

Low energy prices are a significant foundation of inflation and the health of the U.S. economy—the CPI data on these show why inflation has slowed.

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