Monday, October 24, 2016

Gas prices turn higher YoY

 - by New Deal democrat

I've called the current state of the economy "Indian Summer," a spate of positive news during a period substantially after mid-cycle.  But eventually Indian Summer must give way to the Gales of November.  We just got our first chilly breeze.  

In the last few days, according to GasBuddy, the price of gas has turned higher YoY:

A tailwind to consumers has ended.  The problem is, it may turn into a significant headwind in the next 6 - 12 months.

Normally, gas prices fall during the autumn into winder, and then rise in spring into summer, as in the graph below from 2005-06:

The problem arises when gas prices fail to decline, or decline just a small amount, during the autumn and winter, as happened during the prior winter of 2004-05:

Gas prices rose about $1 YoY from just over $2/gallon to over $3/gallon between summer 2004 and summer 2005;

As a result, consumer inflation (red, left scale in the graph below) rose from about 2%+ to over 4%:

Now let's take that same graph and apply it to the last 12 months:

*IF* gas prices follow a similar trajectory to that of 2004-05, we should expect con sumer inflation to rise to more than 3%, and gas prices will be north of $3/gallon again.
Since YoY nominal wage increases are still averaging only about 2.7%, a similar increase in inflation will mean that real wages decline by next summer.  And that would be an important harbinger of the onset of the next recession.