Friday, December 5, 2008

CPI / Nominal Gas Prices

Illustration of Logarithmic Correlation between CPI and Nominal Gas Prices


Purple is my rough, non-mathy estimate of the price curve.

This makes sense to me, because gas prices really have outpaced inflation. Furthermore, as prices rise, substitutes become attractive so there is a natural decrease in the slope of the line. Note that current prices are a bit wierd, having bumped way to the left. However, just as there appear to be supply shocks that reduce the gas supply, so also are there temporary gas gluts. I don't anticipate these being reflected in the CPI because the CPI is incredibly smooth (it takes a long time to change your way of life).

To answer a question I was wondering about: Gas prices have clearly outpaced inflation during what could be considered a "bubble" that started in 2000. The cost of gas outpaced other goods by a considerable margin.

Data comes from the US dept. of Labor CPI data and DOE gasoline price data.

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