- by New Deal democrat
Prepare for the CPI to increase over 1.5%, and perhaps even 2.5%, just by the end of April. That’s the mesage conveyed by the huge spike in gas prices so far this month due to the war with Iran.
Let me start with the blockbuster graph. This is the monthly % change in gas prices at the pump since the onset of the data, measured weekly by the E.I.A:
Just through March 16, gas prices had risen from $2.94/gallon at the end of February to $3.72, an increase of 26.7%, the largest such monthly increase on record. Only two other months approached 20%: May 2009 at 18.9%, and March 2002 at 20.3%. And in both of those cases prices were rebounding from very low levels near the end of recessions. And remember, we still have over a week to go in March, and daily prices as I type this are already at $3.92/gallon according to GasBuddy.
My past rule of thumb has been that to correlate gas prices with CPI, divide them by 14, and add 0.15% for underlying inflation elsewhere. It’s definitely not perfect, but it is usually in the ballpark. For purposes of this post, however, I am being more conservative, dividing the change in gas prices (blue in the graphs below) by 16 and only adding 0.10% to arrive at the CPI forecast (red). Here’s what that looks like, first from 1998 through 2012:
And here is 2013 to the present:
You are reading that correctly. Even with a conservative measurement, a CPI increase of 1.8% is forecast. If you examine the graphs carefully, it is easy to see that the increase most often doesn’t show up in just one month. More often the increase is only 1/3 to 1/2 the forecast number in previous cases when there have been big increases in gas prices in a month. But more often than not, when we include the subsequent month as well as the month of the gas price increase itself, the outcome is very close to the monthly forecast. For example, after plummeting in 2015, in January 2016 the forecast due to the jump in the price of gas was 1.1%. The CPI in January and February of that year increased 0.7%. And more recently, in March and May 2022, the model forecast CPI increases of 1.2% and 0.8% respectively. In March of that year the CPI increased 1.1%, in April 0.3%, in May 0.9%, and in June 1.3%, for a total of 3.7%, due to a 48.6% peak increase in gas prices during that period. Jut through the 16th of this month, the increase in the price of gas was over half of that. At today’s average gas prices, that would be a 32.6% increase.
In other words, based on past history and using conservative assumptions, the model forecasts a 1.8% increase in CPI between March and April. Using normal assumptions it would forecast a 2.1% increase in these two months. And if I were to plug in today’s $3.92/gallon average vs. $3.72, the model would forecast a 2.5% increase in consumer prices by the end of April.
Three days ago I wrote about how real aggregate nonsupervisory payrolls were continuing to increase through February, negativing an imminent recession. I used the graph below to show the decomposition of that metric:
Real aggregate nonsupervisory payrolls have held up because wage increases of about 3.8% YoY have consistently been above the inflation rate of 2.5%-3.0%. But just the 1.8% increase in CPI forecast using conservative methods would mean a 4.0% YoY inflation rate. A 2.5% increase in inflation by the end of April would mean a YoY% increase of 4.7%, swamping wage increases.
In the past, with one outlier (1979), real aggregate nonsupervisory payrolls have declined by between -0.3% and -1.4% from their peak until the onset of recessions, with a median of -0.8%. If we get a 2.5% increase in consumer inflation by April, that will likely more than meet that threshold.
