Tuesday, June 05, 2007

Food Price Inflation = Gasoline Price Inflation

From the 25 year period from 1982 through January of 2007, the CPI for food increased at an annual rate of 2.89%, and the CPI for unleaded gasoline increased at almost exactly the same rate of 2.88% (see graph above, click to enlarge). However, the variability of gas prices over this period was almost 13 times higher than food prices, measured by the standard deviations of gasoline inflation and food inflation, 51% vs. 4% respectively. (And to be fair, if you add in the last several months of gasoline price increases, the 25-year average inflation rate for gas is slightly higher than for food.)

This difference in inflation varability probably explains why you'll find twice as many Google search hits for the term "rising gas prices" comared to "rising food prices." Even though food prices rise historically at almost the exact same rate as gasoline prices, it's the variability of gasoline prices that makes the average person unsettled and upset about gasoline prices and relatively unconcerned about rising food prices.

Bottom Line: Even though gas and oil prices are volatile and change daily, that's not a sign of any market failure, it's actually the opposite: daily proof that the magic of the market is working perfectly and efficiently to continually "clear the market" and prevent shortages and surpluses.

And it's the variability of gas prices that probably explains why there is legislation for "price gouging," "unconscionably excessive prices," and "winfall profits" for gasoline and oil, but NOT for food.


At 6/05/2007 9:20 AM, Anonymous Anonymous said...

It's sort of like throwing the frog in the water and slowly turning up the heat (food) and throwing it in a pot of boiling water (gasoline). Isn't it?

At 6/06/2007 7:42 AM, Blogger sanil kori said...

Well Walt, i think for gasoline its like throwing the frog from one pot to another, each pot with a different higher temperature.... not realising that the frog in the pot with slowly rising temperature(food) will also pass through the same heats.:-)


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