Oil Shocks, Gasoline Prices, and Macroeconomics

July 2026

My introduction to the gasoline pricing literature was the rockets and feathers effect in the late 1990s. I wrote a paper on the topic as a grad student.

Gasoline gets the fourth highest weight in the construction of the CPI. Housing (ownership or rental) are the two largest categories, accounting for 33% of the CPI. New and used vehicles are next at 6.6% (it might be surprising that it’s that high, but it’s true). Then comes gasoline at 2.9%. Since vehicle sales are not independent of the price of gasoline, we’re talking about nearly 10% of the CPI being driven directly or indirectly by gasoline prices, even if we stick within these narrowly defined categories. As someone interested in personal consumption and maintaining low and stable inflation, I thought¹ that understanding gasoline prices was important.

So what we have going on right now is a good example of why we need to understand how gasoline markets work, predict where gasoline prices will move after a particular shock, and determine an optimal monetary/fiscal policy.² At the end of February, crude oil (CLW00) was trading at $67.02. Today it is trading at $68.47. For gasoline (RBW00), the respective numbers are $2.29 and $2.99. The price of oil is approximately back to its pre-war level, but gasoline is trading 30% above its pre-war level.

This is not only a concern for inflation, though inflation is sufficiently important on its own. The effects on the auto industry and other sectors also matter. Consumers will postpone the purchase of vehicles. This will have effects on the labor market and output, but since this is mostly postponing vehicle purchases rather than eliminating vehicle purchases, we expect an increase in demand for vehicles in the future, once the price of gasoline falls.

Hopefully this clarifies why someone that claims to be a macroeconomist (me) has an interest in the price of gasoline.