While the economy has been on a strong recovery trek, the rising cost of gasoline has left many drivers fuming. Wall Street is now paying attention, with the consumer price index – a key inflation gauge – rising more than expected. That has significant implications for monetary policy and even for 2024 presidential election outcomes. Subsequently, investors want to know why gas prices are going up and whether the trend will continue.
According to a CNBC report, the CPI increased to 3.5% in March, above economists’ consensus target of 3.4%. Against February’s reading, the broad measure of goods and service costs across the economy moved up 0.4%. Excluding volatile food and energy components, the core CPI reading also moved up 0.4% on a monthly basis. From one year ago, the measure jumped 3.8% compared to estimates calling for 3.7%.
One of the primary drivers of the headline inflation in March was gas. A combination of acute catalysts and rather mundane dynamics explain why gas prices are going up. Obviously, the geopolitical backdrop – Russia’s invasion of Ukraine along with oil-producing nations’ coordinated production cuts – explain the bulk of the story.
However, as CNN points out, there’s also a less-scandalous explanation: Gas prices always rise during this season, when winter weather fades and roadgoing activity increases.
Explaining Why Gas Prices Are Going Up Is Only Part of the Story
According to Bespoke Investment Group, since 2005, there have only been three years when gas prices fell during the current time of the year. Of course, one of those years was 2020, when the Covid-19 crisis capsized the global economy. Further, the year-to-date increase in fuel costs are not that remarkable compared to historical norms. So, historical trends explain part of why gas prices are going up.
Indeed, the argument is that the pain at the pump would have to increase significantly before it impacts the Federal Reserve’s monetary policy. Moreover, another reason why gas prices are going up stems from curtained refinery activity.
For example, extreme winter weather in January knocked some refineries offline. However, these factors are likely not to recur consistently, providing some hope for drivers.
Nevertheless, explaining why gas prices are going up reflects only part of the narrative. The other major component is the future trajectory of fuel costs.
That’s a much trickier dynamic to decipher. Last year, major oil-producing nations led by Saudi Arabia and Russia capped crude oil output. Earlier this month, the group agreed to extend these cuts through June to help avoid a supply glut.
Perhaps most pressingly, Russia has shown no sign whatsoever of ceasing its military hostilities. Ukrainian forces have begun to strike oil refineries and factories deep in Russia proper, potentially exacerbating upside pricing pressure.
Why It Matters
Fundamentally, investors cannot lose sight of the fact that in explaining why gas prices are going up, the CPI report reflects pain for American households. It also raises concerns over the potential for rate cuts in 2024.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
