In the fight to bring down inflation, the falling price of gasoline stands out, even if Federal Reserve policy has little to do with it.
The national average for unleaded gas was $3.14 a gallon on Dec. 12, according to AAA. That’s 23 cents less than it was a month ago and the lowest it has been in nearly a year.
The biggest driver behind cheaper gas is falling oil prices. The price of Brent crude, the international benchmark, has plunged around 20 percent to $76 a barrel since approaching $100 in late September.
Gas prices usually start abating in the fall, as most states switch to a cheaper blend of fuel that contains more butane. Demand also drops after summer, which is peak driving season in the United States.
Higher gas prices are a burden for consumers, particularly for lower-income Americans who spend a high share of their income on fuel, and a headache for elected officials whose approval ratings can be linked to how much consumers pay at the pump. They have also been one of the starkest symbols of high inflation for the past two years: The average price of gas rose above $5 per gallon in June 2022, when overall inflation reached 9 percent.
The Fed’s preferred measure of inflation does not consider volatile prices like those for fuel, and economists tend to play down gas prices when looking at structural inflation. Oil prices are largely determined by geopolitics and the whims of foreign markets, though the president has the power to exert some deflationary pressure through the Strategic Petroleum Reserve, the nation’s emergency supply of crude.
Gas prices are nonetheless top of mind for Americans, particularly when it comes to forming their opinions of the economy and elected leaders.
Research from Carola Binder, an economics professor at Haverford College, has found that consumer sentiment becomes significantly more pessimistic when gas prices are higher, and that Americans view soaring gas prices as a negative portent for the economy as a whole. In turn, gas prices are also tied to presidential approval, according to political science research.
The fall in gas prices has come as consumer sentiment has rebounded, although it remains below prepandemic levels. According to the University of Michigan’s survey, a closely watched indicator, consumer sentiment in December shot up 13 percent compared with the previous month. Overall, consumer sentiment is nearly 40 percent higher than in June 2022, the lowest in the survey’s history, when gas prices last reached $5 a gallon and inflation was at a four-decade high.