Gasoline Affordability Index: Sliding Back to the 1960s

For some time now, the real price of gasoline has exceeded the heights it reached during the 1980s. But what about its affordability?

The following figure, which assumes a current price of regular gasoline of $4.10 a gallon, plots trends in the U.S. gasoline price from 1949 through mid-2008, using three different measures: (a) nominal (or current) dollars, (b) real (i.e., inflation-adjusted) dollars, and (c) a “gasoline affordability index” (GAI) which is the ratio of the real disposable personal income per capita to the real gasoline price, indexed to 1960 (that is, 1960 affordability =1). [See Notes 1-3 for data sources.] The higher the Index, the more affordable the gasoline.

This figure shows that:

1. Both the real and nominal price of regular gasoline are the highest they’ve been since at least 1949.
2. Gasoline affordability peaked in 1998 at 3.32, relative to 1960 (=1).
3. Today the gasoline affordability index is at 1.35, lowest since 1982 when it was 1.31.
4. Today gasoline affordability is down to levels of the mid- to late-1960s.
5. Relative to 1998, the price of regular gasoline increased by 287 percent in nominal terms and 208 percent in real terms. However the affordability index declined 59 percent.

The disposable personal income per capita between 2007 (average) and May 2008 increased by $1,627 (in real 2000 $) according to the BEA, while the average person’s real expenditures on gasoline increased by $493 (or less). See Note 4.

Unfortunately, gasoline prices aren’t the only ones to have gone up. Energy prices are all up, as is food. So it won’t be surprising if these increases more than eat up any advance in disposal personal income. I’ll check this out one of these days.

Notes

1. The figure uses the price of regular leaded gasoline from 1949-1975, the arithmetical average of average of regular leaded and regular unleaded gasoline for 1976-1990, and regular unleaded for 1991-2008. For 2008, I have assumed a gasoline price of $4.10 per gallon. Gasoline price data are from the Department of Energy (DOE), Motor Gasoline Retail Prices, U.S. City Average, available at http://www.eia.doe.gov/emeu/mer/prices.html.
2. For estimating the real price, I used the implicit price deflator for GDP from the Bureau of Economic Affairs (BEA), available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp, Table 1.1.9 (for 1949-2007) and Table 2.6 (for May 2008).
3. Data on real disposable income per capita are also from BEA, available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp, Tables 2.1 (for 1949-2007) and Table 2.6 (for May 2008).
4. Average annual motor gasoline consumption was 475 gallons per year in 2007, and the real gasoline price over this period increased $1.04 (in real 2000 $). Average consumption has probably declined somewhat from last year.