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Gasoline Prices vs. Wages Over Time

Historical Gasoline Prices in Pictures-- I thought it would be fun to look at some pictures of gasoline prices in days gone by. Of course, we have to remember that salaries were much lower in those days as well. Inflation doesn't affect all prices equally. Let's look at how Gasoline Prices and Wages relate since the 1920s. In 1924 my grandfather probably paid around 21 cents a gallon for gasoline. The average wage was about 62.6¢/hour. But that was just the average, a unionized … [Read More...]

Can Businesses Really Set Any Price They Want?

There is a common belief that a company can arbitrarily pick any price it wants for its products and then make obscene profits. And while it is true that a company is certainly free to set its prices, that doesn’t mean that consumers have to pay them. There are a variety of other factors at play.

Annual Inflation Retreats in October

The Bureau of Labor Statistics reported that Annual Inflation for October 2022, fell from 8.20% to 7.75%. The stock market saw this as an encouraging event, and the NYSE rallied 4.4% on the day while the NASDAQ rallied 2.2%.

Inflation Summary:
Annual Inflation fell from 8.20% to 7.75%
CPI Index rose from 296.808 to 298.012
Monthly Inflation for October was 0.41%
Next release is December 13th

November FED Announcement Rocks Stock Market

On Wednesday, November 2^nd, the FED held its “Federal Open Market Committee meeting” and made the announcement the market has been breathlessly awaiting. As expected, Chairman Jerome Powell announced a hike of 75 basis points in the fed funds rate. Along with the announcement, the market was hoping for some indication of a “pivot”, i.e., that the FED would give some indication that it was going to be slackening off on its rapid rate increases.

And in this respect, the FED did throw the market a bone. It added the new phrase “Cumulative Tightening” to the standard announcement. So, going forward, the FED will take the fact that it has already raised quite a bit into its calculations. In addition, the FED emphasized that it was still focused on being “sufficiently restrictive to return inflation to 2 percent over time”. Apparently, the phrase that the market latched onto was “Cumulative Tightening,” and it took this as a signal that the FED might, possibly, not raise so aggressively in the future.

What is the Reverse Wealth Effect and Why Does the FED Want It?

To understand the reverse wealth effect first we must understand the economic concept of the “Wealth Effect”. According to Economics Help the “Wealth Effect” occurs as “Rising personal wealth has a positive effect on consumer spending”. In other words, when people feel richer they spend more.

September 2022 Inflation Virtually Unchanged

The BLS Commissioner reported, “The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in September on a seasonally adjusted basis after rising 0.1 percent in August, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 8.2 percent before seasonal adjustment.

Increases in the shelter, food, and medical care indexes were the largest of many contributors to the monthly seasonally adjusted all items increase. These increases were partly offset by a 4.9-percent decline in the gasoline index. The food index continued to rise, increasing 0.8 percent over the month as the food at home index rose 0.7 percent. The energy index fell 2.1 percent over the month as the gasoline index declined, but the natural gas and electricity indexes increased.”

On an annual (non-adjusted) basis, inflation actually fell slightly from 8.26% to 8.20% or 6/100ths of a percent. This is virtually zero. Looking at the monthly changes in the chart below, we can see that Food Increased 8/10ths of a percent while energy fell -2.1%. New vehicles rose 7/10ths of a percent while used vehicles fell -1.1%. Shelter, Transportation, and Medical all rose.

Without looking at inflation-adjusted prices it is difficult to see where gasoline prices actually stand. Back in 1918 gasoline was $0.25 a gallon and by 1932 prices had fallen to 18 cents a gallon! But as we all know over the last 100 years the purchasing power of the dollar has fallen drastically so in order to get the true picture we can’t just say that the lowest price of gas was 18 cents per gallon, we need to adjust the price for inflation. When adjusting for inflation there are two prices… the first is called the “nominal price” and that is the actual price you would have paid for gas at the pump. The key price though is the inflation-adjusted price which calculates what the price would have been if we were spending current dollars on a specific date. In this case, we are basing our calculations on the value of a dollar in January 2020.

Inflation Adjusted Housing Index since 1890

Inflation Adjusted Real Estate Prices- Lets take a look at the idea that housing prices always go up. Of course, each neighborhood is different, so some neighborhoods might be going down while a few miles away housing prices are skyrocketing but by looking at the nationwide average we can get a better picture of the overall trend. The St. Louis Federal Reserve publishes the following chart that shows the S&P/Case Shiller National Home Price Index and by adjusting those prices for inflation we can get a better picture of how real estate prices really act. Is a home a good investment or not?