Photo: Flickr / whatatrivisty
Great point here from Barclays’ Peter Newland on the topic du jour: What matters is not rising gas prices; what matters is the speed at which gas prices are rising.As we showed in a simulation study last year, the effect on growth of a rise in energy prices depends importantly on the abruptness of the increase. We found that, given a gradual and temporary rise, consumers are able to adjust saving patterns to smooth consumption, minimising the impact. However, a sharp and sustained spike has a more significant effect on consumer behaviour. The surge in early 2011 came against the backdrop of the onset of troubles in Tunisia, Egypt and Libya. As yet, no comparable trigger has emerged in 2012, although geopolitical risk is ever present.
Based on current futures pricing, the retail gasoline price looks set to rise to a similar high point just below $4 per gallon this year, most likely in Q2. However, the rate of energy price inflation that this implies is significantly less than in the same period last year, given the higher starting point and less rapid ascent. Indeed, current futures pricing would be consistent with around a 10% q/q (saar) increase in the gasoline component of the CPI in Q1, and a broadly sideways move in Q2. By comparison, gasoline inflation was close to 50% in Q1 2011 and prices rose a further 31% in Q2.
Moreover, unlike a year ago, non-gasoline commodity prices have not risen significantly in recent months, suggesting that other components of non-core inflation might not add as much to higher gasoline prices this time around. For example, natural gas prices fell by more than 40% between January 2011 and January 2012. Although this accounts for a much smaller share of headline inflation, it is another price-inelastic component of household expenditure and should offset in part the rise in gasoline prices relative to the 2011 episode. Meanwhile, pipeline food price pressures have eased: the consumer foods component of the PPI rose 2.7% 3m/3m annualized in January 2012 versus 9.9% in January 2011.