Inflation-Adjusted Oil Prices Put Current Rise In Perspective

The recent rise in oil prices is reflected in high gas prices (Photo by Brooks Kraft LLC)

Corbis via Getty Images

Today’s volatile and seemingly high oil prices produce large headlines, but how bad is it, really? To answer that question, we need to adjust historical oil prices for inflation. Otherwise, we get this misleading picture, with the March high price of $124 and current price of $108 looking extreme.

Unadjusted oil prices

John Tobey (FRB of St Louis – FRED)

Look especially at that low $38 high price in 1980 when inflation was running rampant. Today’s price is not triple that level. Adjust for the past 42 years of inflation and that $38 high becomes $140 in current dollars. That puts the current $108 price into proper perspective.

Inflation-adjusted vs nominal oil prices

John Tobey (FRB of St Louis – FRED)

Oil price trends can last a long time and be “noisy”

The other items to note in the inflation-adjusted graph are how lengthy oil price trends can be and how volatile they can be. The current two-year oil price uptrend could, of course, end at any time. However, if the inflation uptrend continues and global supply/demand issues remain, it could extend for many more months – even years.

Note: Economists dislike volatile data because they make economic models less trustworthy. Therefore, most (including members of the Federal Reserve) prefer their inflation measures to exclude energy prices as well as food prices, which also can be volatile. But, wait. What do people talk and fret about, and what do news reports focus on when inflation rises? Right – energy and food. Just because those prices are volatile (AKA sensitive to inflationary and supply/demand changes) does not make them poor measures. In fact, their volatility ramps up inflation concerns.

The bottom line – Inflation adjust for reality

Comparing 2022 prices with 2021 prices is misleading with inflation running at 5+%. Extend the comparison further back and the inaccuracy becomes larger – to the point of becoming useless. Therefore, we need to get rid of the cheapening dollar to understand underlying trends wherever currency measurements are involved. And that includes investment trends. Otherwise, stock gains are overstated and lost purchasing power in “safe” investments are ignored.

Prices posted on vintage gas pump.