Gasoline Is 'Falling Like A Rock': Is Deflation Coming To Town?

Let’s dive into the two key components in the Consumer Price Index (CPI) that have seen the most inflationary pressures since the year began, and even more so on a 12-month unadjusted basis: gasoline, +44%; oil, +75.6%.

What Happened: Fundstrat’s Managing Partner Tom Lee sees a light at the end of the tunnel. 

“If you look at the 1970s to 1980s, gasoline never had a drawdown. A decline of more than 2% on a year-over-year basis in the CPI until 1982, we’re already seeing gasoline fall like a rock," Lee said.

Lee’s call-back to the ’70s and ’80s was to point out a period of time known as The Great Inflation. Lasting from 1965 to 1982, it was stoked by the easy money policies by the American central bank. The Fed later reversed its policies, raising interest rates to roughly 20%.

“.. look at the 1970-1990 period. .. Gasoline rose for a decade before it even started to fall .. it did not register a single peak to trough drawdown of more than 2% in that 10 years ..” @fundstrat pic.twitter.com/aCO0waDhvJ

— Carl Quintanilla (@carlquintanilla) September 7, 2022

Gasoline prices rose on a consistent basis from 1972 to 1981, the year gas prices flatlined and ended up being a precursor to a massive decline in overall CPI.

Read also: Oil Stays Weak On China's Fresh COVID-19 Curbs: Supply News Trickles In Ahead Of OPEC+ Meet

Not getting too far ahead of the August 2022 CPI, a look at recent data showed gasoline prices fell 7.7% last month, the most since April 2020, after rising 11.2% a month earlier.

According to nationally aggregated GasBuddy data, the average gas price in the U.S. had decreased for the 12th week in a row, or roughly 85 days. This is down 7.7 cents from a week ago to $3.75 per gallon on Thursday, or about 25% since the decline started.

What's Next: Despite the fact that prices are beginning to level out, a number of factors raise the possibility of continued high inflation. A significant one is housing costs, along with unforeseen supply disruptions. Some economists are concerned about a so-called wage-price spiral as wages continue to rise at a historically rapid rate.

Bloomberg economists Anna Wong and Andrew Husby said the core CPI — the Fed’s preferred measuring stick — could approach 7% in the coming months, with rents still increasing and elevated wages beginning to seep into services inflation.

Light at the end of the tunnel? @fs_insight Managing Partner @fundstrat thinks rising prices might've "hit some sort of wall" and will start falling quickly, predicting that the current job market could also be much weaker than it appears. pic.twitter.com/FwbKwbSle7

— TechCheck (@CNBCTechCheck) September 6, 2022

Photo: Brian A Jackson via Shutterstock