Gasoline Prices and the October-November CPI Outlook

November 8, 2005 – The U.S. CPI shot up by 1.2% in September (Chart 1). The surge in September energy prices contributed about 1 percentage point (pp) of the total increase. A 17.9% leap in September gasoline prices accounted, in turn, for about 70% of the energy contribution to September CPI growth.

Chart 1. Percent change in the CPI. January 2000 through September 2005 and forecasts for October and November.

Since the end of September, however, gasoline prices have fallen for 5 straight weeks. According to the Energy Information Administration, the average U.S. retail price for regular gasoline was $2.376 on Monday, November 7 – down 10.4 cents from its level one week ago and down 69.3 cents from its September 5 peak of $3.069 (Chart 2).

Chart 2. Weekly U.S. gasoline prices, October 4, 2004 through November 7, 2005.

For all of October on average, these gasoline prices fell by 6.4%. This translates into a seasonally-adjusted decline of 5.9% (Chart 3).

Chart 3. Percent change in U.S. gasoline prices, July through October 2005 and November estimate.

Further, as of November 7, gasoline prices were 12.5% below their October average. If they were to simply stabilize at this level for the rest of the month, the seasonally-adjusted decline in November gasoline prices would be nearly 13%.

This decline in October gasoline price growth should be sufficient to slow October CPI growth by about 1 pp, compared to September’s increase (Chart 4).

Chart 4. Contribution of gasoline prices to CPI growth. July through September 2005, and October-November forecasts.

The even sharper reduction currently shaping up in November gasoline prices favors even weaker CPI growth that month.

To get from here to a CPI forecast, assume some related weakening in consumer energy prices other than gasoline, and steady growth in the CPI’s non-energy components. Then, we would probably see near-zero CPI growth in October, and a November decline of about 0.5%.

Suzanne Rizzo