Fueling Some Relief into the New Year

January 04, 2023 | Peter Como, Research Associate

Two-line chart comparing gasoline prices and CPI month over month. Chart subtitle: Macroeconomic shocks tend to drive up the correlation between gasoline and overall CPI. Chart visual description: All data monthly. Left y-axis is labeled Gasoline ($/gallon) and ranges from $0 to $6. X-axis spans dates from December 2006 through December 2022, with labels at 6-month increments, thus alternating June to December. Right y-axis is labeled CPI Month/Month and spans -2.0% to +1.5%, with 0.5% increments. X-axis crosses 0 for gasoline price y-axis and -2.0% for CPI y-axis. Slate line plots Gasoline Price; dark teal line plots CPI M/M. Green dotted arrows highlight Strong Positive Correlation over several periods. Chart data description: For period shown, gasoline prices peaked in June of 2022 at $4.93 per gallon. The next most recent peak outside 2022 was in April 2012 at $3.90 and the next closest peak was in July 2008 at $4.06. Prices have generally increased since 2020, though between June and December this year they have receded. Month-over-month CPI generally has hovered between -0.5% and +0.5% but the two tend to move similarly amid more intense economic turbulence. Chart source: Bloomberg, Federal Reserve Bank of St. Louis as of December 31, 2022. End chart description. See disclosures at end of document.

Last summer, gasoline prices retreating was one of the first bright spots at the macroeconomic level. Since then, CPI has generally followed suit, correcting from a peak of 9.1% year-over-year in June to 7.1% in November. Gasoline prices are broadly a product of global supply and demand, with many economic variables at play. As a notable component of the CPI basket, it is no surprise that the price of gasoline usually moves in line with inflation, however, historically, the correlation between the two has increased during times of economic turbulence. Correlations spiked during the Global Financial Crisis in 2008, the oil price shock in 2014, and again in 2020 when COVID hit and oil futures plunged into negative territory. Correlation remained high heading into 2023, with gasoline prices turning deflationary year-over-year. Inflation is expected to continue lower from here as the Fed prioritizes price stability via higher rates. While heightened macro uncertainty remains, and other factors including weather and refinery operations can impact prices for consumers at the pump, experts generally expect overall lower gasoline prices as well, with the EIA forecasting a 12% drop in the average price per gallon in 2023 from 2022. To the extent historically higher correlations hold, the consumer should continue to benefit from some relief when refueling.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Peter Como
Research Associate

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