Gas Prices are High — But Don’t Adjust Them for Inflation!

Gasoline prices are high and rising. Anecdotally, they seem to be increasing at the pump by the hour. And indeed, in nominal terms they are now the highest they have ever been in the US (this is true with both the AAA daily price level and the EIA weekly price level). At over $4.10 per gallon, the price now exceeds the peaks briefly hit in 2008, 2011, and 2012. And it’s looking like this peak might not be so brief.

But we all know you can’t compare nominal dollars over long periods of time. We need some context for this price! Plenty of news stories provide what they think is the right context: adjust it for inflation! For example, USA Today reports that today’s price “would come to around $5.25 today when adjusted for inflation.”

$5.25: that’s a pretty concrete number. But it’s not really useful. OK, so clearly that’s higher than the current price, about 20% higher in fact. Still, it doesn’t really give us the right context.

As I argued in a previous post on housing costs, inflation adjustments aren’t always the best way to contextualize a historical number. Yes, when you want to compare income or wages over time, it’s good to adjust for inflation. It’s necessary, in fact. And a good economist will always do that.

However, when comparing particular prices over time, it doesn’t really make sense to adjust for other prices. All you are really saying is “if the price of gasoline increased at the same rate as the average price level, here’s what it would be.” Perhaps slightly useful, but it doesn’t really get at the thing we’re really try to address: is gasoline more or less affordable than in the past?

The best approach is to adjust the prices for changes in wages or income. Which measure of wages or income you choose is important, but it’s the best adjustment to make. No need to make any inflation adjustments, are worrying about whether the index you choose is properly accounting for quality changes, substitution effects, etc. If you want to know how affordable something is, compare it to income.

Here’s what I think is the best simple comparison for gasoline, which I’ll explain it below. In short, it tells us how many minutes the average worker would need to work to purchase one gallon of gasoline.

Since the price of gasoline is rising sharply every day lately, my chart will surely be out of date very soon. But right now, it’s the most current data I could provide with a comparable historical series: EIA weekly data current through March 7th, 2022 (Monday). We can see that at current prices, it takes about 9 minutes of work at the average wage to purchase a gallon of gasoline. At the peak in 2008, it took over 13 minutes of work to purchase a gallon, and it fluctuated between 10 and 12 minutes of work for much of 2011-2014.

Now none of this is to say that gasoline prices aren’t putting a real squeeze on some household budgets. This would be especially true of workers that aren’t able to get as many hours of work as in the past, since I’m just using an hourly wage to do the calculation. Furthermore, the very sharp increase in a short period of time can be challenging for household budgets even if it is still below some past historical level. Notice that the “minutes of work cost” has roughly doubled since the lows of early 2020, and is significantly higher than 2015-2019.

Still, with all this we can come up with a comparable gasoline price that would roughly equate to the peaks of 2008: about $6 per gallon ($6.079 to be precise). That’s how high gasoline prices in the US would need to go before we are at same cost in terms of the average worker’s time to purchase a gallon of gasoline. Alternatively, if gasoline gets to $5 per gallon, we’d roughly be in the range that persisted for much of 2011-2014.

I think these numbers offer a much better historical contextualization than the inflation-adjusted numbers you may have seen.

(At the AAA daily price for March 9 of $4.252/gallon, the “minutes of work cost” goes up from 9.1 minutes to 9.4 minutes of work.)

Income Measure

For my income measure, I have used “Average Hourly Earnings of Production and Nonsupervisory Employees” from BLS (as usual, FRED has the most user-friendly series). While the title may lead you to believe this data series is only for manufacturing workers, it is much broader than that including about 100 million of the 150 million workers in the US labor force. And more importantly, it excludes most managerial and supervisory wages, so it doesn’t bias the average upwards. It’s a very broad-based measure, which is available in close-to-real-time (the data is current through February 2022, but I estimate March wages assuming roughly the same growth rate as recent months).

But aren’t median wages better? Yes. However, median wages aren’t available in real time. In fact, most sources, such as BLS/OES and EPI, only have them current through 2020. But here’s the upshot: while the level of median wages is below average wages, the growth rate of the two are very similar over long periods of time. So, while my chart won’t get the exact number of minutes correct for a median wage earner, it is still useful for historical comparisons.

More Fuel-Efficient Cars Today?

Finally, aren’t cars more fuel efficient today? And shouldn’t that factor into our calculation? Ideally, we would factor this in, but when doing the comparison since 2008, it doesn’t make much difference. The Bureau of Transportation Statistics does produce a historical average of fuel efficiency, and I have seen some charts online which try to use this to make a historical comparison. The problem with this series, if you look at the footnotes, is that the methodology changes in 2007. I’m hesitant to use this data for long-run comparisons.

But the methodology is consistent since 2008, but another issue is that the data is only current through 2020.

But with those data limitations, let’s do a quick comparison with the previous peak in 2008. For my comparison, I’m going to use “minutes of work needed to drive 100 miles at the average fuel efficiency.” And I’ll assume 2022 fuel efficiency is similar to 2020.

In 2008, it would have taken about 60 minutes of work to purchase enough gasoline to drive 100 miles. Today, that number is closer to 40 minutes of work. Similarly to the minutes of work calculation in my chart, we’d need about a 50% increase in the price of gasoline to about $6/gallon to reach comparable levels to 2008. And that’s for a simple reason: average fuel efficiency didn’t actually increase much from 2008 to 2020, rising from 21.8 miles per gallon to about 23 miles per gallon today.

To be sure, that is much higher than 1980, and the fuel efficiency of new cars has risen from just over 30 mpg to almost 40 mpg today. But not everyone drives new cars. Bottom line on fuel efficiency: doing this adjustment doesn’t change the picture much.

But Gas Prices Still Hurt

To the worker today filling up his tank today, it’s cold comfort that at some point in the recent past prices were higher, using the adjustments I have made here. But still, if we want to give the right historical context, adjusting for inflation isn’t really useful. The inflation-adjustment gives us a relative per gallon price of about $5. But the wage-adjustment gives us a relative price of $6.

And this is true for a good reason: despite what you may have heard, wages have indeed been rising faster than prices in recent years. Perhaps not as fast as we would like, but price inflation has not wiped out all the nominal wage increases since 2008.

2 thoughts on “Gas Prices are High — But Don’t Adjust Them for Inflation!

  1. Matthias March 9, 2022 / 8:35 pm

    You could also look at the price of petrol compared to nominal GDP per capita.

    Liked by 1 person

  2. Jssaab May 10, 2022 / 6:21 am

    But waht about utilization? If we want to compare prices to income we would also need to include the utility? In 1970’s average car mpg was 11. Now it is 25/mpg. Of course mile drvien per person doubled but that was motivated by increase fuel mileage (more utility) as well. Interesting that you may wonder that regualtion (CAFE requiremnts) most like drove the increase in average effeicney of cars

    Like

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