One Picture Explains Why People are Wrong About Inflation


I would like to credit Max Keiser’s blog with providing the following picture which was taken a few weeks ago. A the time,  national oil prices were around $3.80 per gallon, I am going to assume the picture is from a California gas station. In Los Angeles, the price of gas was $4.70 due a combination of regional factors (lack of pipelines and higher fuel quality standards).

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While the price of gas in California is very high, gas prices across the nation are high – particularly compared to where they were a couple years ago. Two years ago (September 2010), the national average was only around $2.80 per gallon.  Thats an increase of about $1 per gallon or 30% to today’s average level of around $3.80.

I believe fuel prices have a major impact on the way most people feel about inflation. This thought was inspired by the blog Prison Planet where they talked about the Everyday Price Index, a version of CPI index which strips out items that people only purchase occasionally. It asks what prices are most visible and memorable to most consumers.

People go to the gas station a fews times a month. That’s frequently enough that they have a good handle on what they have recently paid, but not so frequently that they see every incremental price move. As people are buying one item and more or less the same amount of that item each time, many consumers believe that gas prices represent a good barometer of inflation.  I put grocery prices in same category as gasoline prices.

There Are Three Problems Related To Using Fuel Prices (or groceries) As A Barometer for Inflation

1) Fuel and food prices are linked to commodities to a much larger degree than the other things most people spend money on. Changes in commodity prices have very limited impact on the majority of one’s budget which is comprised of things like rent, mortgage payments, cable bills and cell phone fees.

2) People are using less fuel. Cars are becoming much more efficient, which means less trips to the gas station. Sometimes subtle changes in usage patterns, like filling up every every two weeks instead of every 10 days, do not enter people’s inflation “calculation”.

3) People tend to remember the bad and not the good. From the middle of 2011 to the beginning of 2012, gas prices fell dramatically. The same thing occurred in the second quarter of 2012. However, most consumers will tend to remember paying more at the pump.

The Truth Is Inflation Is Low

Inflation is the currently at 2%.

Since the financial crisis the highest that inflation was just under 4%.

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