With U.S. oil supply falling and world demand rising as economies reopened, the average price of regular gasoline (which had fallen from $2.88 a gallon in April 2019 to $1.72 in April 2020) quickly recovered to $2.72 in April 2021. The gasoline price was widely reported as 58 percent “inflation” although gasoline was cheaper than in April 2019.
By October 2021, the price of WTI crude peaked at $81.48, though the year-over-year change slowed to 107 percent. The price then settled down to $70 during the first 20 days of December. On December 21, the Energy Information Agency predicted “prices will remain near current levels in 2022, averaging $70 (using Brent crude which is pricier than the WTI). That would be higher than the pre-pandemic price below $60 or the 2021 median price of $69.
If the EIA forecast is right and the monthly price averages$70 a barrel before the November elections, that would rapidly shrink the year-to-year change to 35 percent in January, 19 percent in February, 12 percent in March, ‑1.9 percent in June, and ‑16.4 percent by October 2022. The 12-month rate of oil price inflation would not fall as quickly if the oil price instead averages $75 a month –as depicted in the graph– but the year-to-increase would still drop to 5 percent by June and to ‑7.4 percent by October.
A year-to-year drop of 7–16 percent in the oil price would be modest by previous experience. Year-to-year crude oil prices fell by 34–58 percent in 1986, 1991, 1997, 2001, 2009 and 2015, though it sometimes took more than 12 months for the price to fall that much. Falling year-to-year oil prices, in turn, brought slow or negative year-to-year CPI inflation.
In October 1990, when the price of WTI crude oil was up 78.8 percent from the same month in 1989, the consumer price index was up 6.4 percent from a year earlier. But one year later, WTI crude oil had fallen 35.3 percent and year-to-year CPI slowed to 2.8 percent.
In July 2008, when the price of oil was up 79.9 percent from a year before, consumer prices were up 5.5 percent. But one year later, the crude oil price had fallen 52 percent year-to-year and CPI inflation turned negative, to minus 2 percent.
As we now look ahead to 2022, the year-to-year rise in oil prices will start to turn negative by June if oil stays around $70 or October if it stays near $75. Year-to-year reported inflation in energy-intensive goods and services can likewise be expected to slow sharply as 2022 progresses.
The second graph from FRED (Federal Reserve Bank of St. Louis) shows how year-to-year changes in the CPI for transportation, for example, move up and down with year-to-year changes in the oil price. Producer prices for oil-intensive products such as fertilizer and plastics also follow oil prices up and down. Like transportation costs, those prices also greatly affect prices of other products — such as grain, dairy, and meat prices in the case of fertilizer, and packaged goods in the case of plastics.