Monday, February 13, 2012

Inflation roars back

Having suffered through the inflation of the 1970s and early 1980s, this is ugly.  Gasoline - even faced with weak demand - is headed to $4.00 a gallon:
As the weekly Lundberg survey shows, in the week ended February  10, gas rose by 11.57 cents to $3.5101, the highest since September. The latest price is also 12% higher compared to a year earlier. What is troubling is that as the attached chart shows, the trend of gradual gas price declines has now firmly ended, having touched a low of $3.20,  and has been replaced by a steady climb over the past 2 months. In other words, the US consumer's retail spending has been far weaker than expected in November and December, and soon to be discovered in January, primarily due to gas purchases, which have already plunged as discussed recently, once again taking up a substantial portion of the discretionary spending basket (on credit at that). And what is worse, is that as the LTRO #2 is about to add another several hundred billion to the ECB's balance sheet, which will ineivtably be followed by more Fed printing, the Gasoline trendline has only one way to go. Expect the recent highs of $4.00/gallon to be taken out shortly, and to lead to yet another GDP roll over once again. Alas, none of this will be a consolation to European readers, who a few days ago just saw gas hit all time highs.
Of the face of it, this seems to violate the law of supply and demand - when demand falls, so must price.  We're seeing prices go up even when demand is down.  Why?


The Fed printed a ton of money with their Quantitative Easing #2, and the folks who sell us oil aren't idiots.  Since there are more dollars for the same US GDP, each dollar is worth less.  And so the (nominal) price of oil goes up.  The real (inflation-adjusted) price is likely flat, or a little down.

So what is the real price of oil?  We don't know, because the price of energy is helpfully excluded from the CPI.  Don't look to your government to tell you any data here.  The fact that they won't tell you is all you need to know.


Jake (formerly Riposte3) said...

I expect that when it does hit $4 a gallon the rest of the economy is going to tank, too, due to the psychological effect causing reduced consumer spending. Something about crossing that whole-dollar threshold seems to hit people harder.

wv: rulenfu - Obama's next catchphrase, "I'm rulen, FU!"

Rev. Paul said...

Our price of $3.71 to $3.75 is down three cents today. Ain't no one sayin' they know why.

Duke said...

Demand is down and prices should be down EXCEPT the unrest in the middle east is way up so the demand has not offset it totally. If demand was higher the price would be a lot higher still.

Old NFO said...

Yep, at this point the CPI is ONLY what the administration wants it to be... NOT to be confused with reality!

FrankC said...

When the gas pumps start to display volumes in liters you'll really start to hurt.
$1 per liter anybody? And that's near the current price. Or how about 50c/pint to avoid metric?

w/v killygop - is not the right attitude.

TOTWTYTR said...

Demand is WAY down, which is not a good sign for the economy. The value of the dollar is down, which is an even worse sign for the economy.

Canada would like to sell us shale oil, which is "ethical" oil, but you know who in the White House thinks it's good policy to drive gas and heating oil prices through the roof.

Apparently he doesn't realize that part of the reason he's in the WH is that people took out their anger at GW Bush over high fuel prices on one Sen. John McCain.

Jake is right, there will be a cascade effect from unsustainable fuel prices. We'll pay more for groceries, clothes, tools, toys, and anything else delivered by truck, train, plane, or boat.

Which come to think of it, is everything.

Ruth said...

Tell me about it, lowest price I saw today was $3.75, average is closer to $3.81....... Can you say oww?

dsmith512 said...

Demand is down but the oil companies shutdown two refineries, at least this was the reason given for price increases. There will be less gasoline in the future without these two refineries.