Gas prices and inflation

The Consumer Price Index for All Urban Consumers (CPI-U) for All Items for the U.S. city average increased 1.9 percent in 2003, down from a 2.4-percent rise during the prior year, according to data from the Bureau of Labor Statistics. (1) Either lower price increases or larger price decreases were reported for a wide range of expenditure categories for both commodities and services. The 2003 deceleration in the all items index largely reflects lower price increases for shelter, gasoline, and medical care (including hospital services, physicians' services, and prescription drugs). Additionally, durables prices decreased more in 2003 than in 2002. Telephone services prices also decreased sharply in 2003, after increasing very slightly in 2002.

Excluding both food and energy, the commodities index decreased 2.5 percent last year, after decreasing 1.5 percent in 2002, the largest calendar-year decrease since the BLS began keeping records in 1958. Durable commodities prices (including vehicles, furniture and bedding, computers, and so forth) decreased 4.3 percent in 2003, following a 3.3-percent decline in 2002, the largest calendar-year decrease since 1938. The nondurables index rose 2.4 percent last year, following a 3.1-percent increase during the earlier year. The aggregate commodities index rose 0.5 percent, following a 1.2-percent increase in 2002. Commodities are generally subject to greater global competition than services, and generally increase in price less than services. Services prices rose less in 2003 than in 2002 (2.8 percent versus 3.2 percent, respectively), reflecting lower increases for owners' equivalent rent, rent of primary residence, and medical care services, and a decrease in telephone services. Service inflation has been decelerating for each of the past 3 years.

The CPI-U excluding food and energy prices (often called the core CPI-U) increased 1.1 percent, after rising 1.9 percent in 2002. (2) (See table 1.)

Other price measures

The Producer Price Index (PPI) for finished goods increased 4.0 percent in 2003. Excluding food and energy, the PPI for finished goods increased 1.0 percent, while the PPI for intermediate materials increased 2.1 percent. The PPI for crude nonfood materials less energy increased 20.8 percent. Prices of the following crude commodities rose dramatically in 2003. Iron and steel scrap prices increased 62.5 percent. Copper base scrap and nonferrous metal ores prices rose 29.8 and 26.1 percent, respectively. Raw cotton prices increased 37.5 percent.

Excluding petroleum, import prices for commodities increased 1.0 percent in 2003, after increasing 0.2 percent in 2002, as measured by the Import Price Index. (The PPI does not reflect changes in import prices.) (3) Slightly rising, or else decreasing, import prices in recent years have damped input costs for many businesses in this country. Furthermore, very low import inflation has inhibited price increases by domestic firms facing import competition.

Energy and food prices

Energy. Energy prices increased 6.9 percent in 2003, after increasing 10.7 percent in 2002. The energy index is composed of two fairly equally weighted components, motor fuel and household fuels.

Energy commodity prices, mainly gasoline and home heating (fuel) oil, rose 6.9 percent. An increase in world demand for crude oil, oil- and gasoline-supply disruptions, colder-than-expected winter weather in this country, and high natural gas prices all served to raise gasoline and heating oil prices.

Prices for energy services (natural gas and electricity) also rose 6.9 percent. Colder-than-expected winter weather and scarce natural gas imports were primarily responsible for last year's high increase in natural gas prices.

Last year, gasoline charges increased 6.8 percent, following a 24.8-percent increase in 2002. Fuel oil prices rose 7.8 percent in 2003, after rising 14.7 percent during the earlier year. Gasoline prices rose during the first and third quarters of 2003--up 21.9 and 14.3 percent on a seasonally adjusted basis, respectively. These charges declined during the second and fourth quarters. The primary reasons for the higher gasoline prices in the first quarter include:

* an increase in world demand for crude oil,

* the war in Iraq that disrupted the supply of oil from that country,

* the disruption of the production of Venezuelan oil following an oil-worker strike there that began in December 2002 and continued during the first quarter of 2003,

* colder-than-expected weather in the Northeast area of the United States led to higher demand for and production of heating oil than usual. Refiners responded by producing more fuel oil at the expense of gasoline. As a result, gasoline stocks dropped to unusually low levels, and

* an increase in the demand for and the production of fuel oil arising from very high prices for natural gas. (Some industrial users and electric power companies have the ability to switch between using natural gas and fuel oil.)

Gasoline production was reduced during the third quarter of 2003 following five refinery shutdowns and a ruptured pipeline. In July, two refinery fires, one in Louisiana and one in Oklahoma, reduced gasoline output. In August, a multi-statewide electricity outage shut down three refineries in Detroit and Toledo. In the Southwest, gasoline supplies were disrupted in July when a gasoline pipeline in Arizona ruptured. (4)

The price of world crude oil increased slightly in 2003, from about $26 per barrel in December 2002 to about $28 per barrel in December 2003. In December 2002, the average price per gallon of regular unleaded gasoline was $1.39. By December 2003, that price had risen to $1.49.

Natural gas prices increased 17.4 percent last year, following a 6.7-percent increase in 2002. Colder-than-expected weather during the first quarter of 2003, insufficient imports, high oil prices, lackluster natural gas production, and very low storage levels early in the year caused natural gas prices to soar. For the 3-month period ending March, this index rose 26.6 percent on a seasonally-adjusted basis. Natural gas prices declined during the remaining three quarters of 2003. Following the first quarter, natural gas inventories grew rapidly as electric power generators and industrial consumers switched fuels; they consumed more distillate fuel oil and less natural gas. Increases in hydroelectric generation also contributed to a decline in demand for natural gas. (5)

In recent years, electric power companies have increasingly relied on clean-burning natural gas to generate electricity. This increase in demand for natural gas has put pressure on a supply restricted primarily to the United States and Canada, the largest exporter of natural gas to this country. Canada exports mostly dry natural gas to the United States, via pipeline. This gas accounts for one-sixth of the natural gas the United States consumes. (6) In 2002, Canada exported 94.3 percent of the natural gas this country imported. The second largest exporter to the United States was Trinidad, who exported only 3.8 percent (in the form of liquid natural gas). (7)

The inability of the United States to increase natural gas imports (compared with crude oil, for example) to meet higher-than-expected demand is a main reason natural gas prices soared last year. Unfortunately, Canada does not have the capacity to appreciably increase its natural gas exports.

Because natural gas is quite challenging to transport as a cryogenic liquid, imports of liquid natural gas have been negligible. The amount of liquid natural gas terminals and imports have been restrained over environmental and safety concerns as well as over cost constraints. (8) Electricity prices increased 2.6 percent in 2003.

Food. Food inflation was higher in 2003, 3.6 percent, compared with 1.5 percent during the prior year. Price increases for beef and veal and eggs were sharp in 2003, compared with 2002. Price increases for pork, chicken, fish and seafood, dairy products, fresh vegetables, and cereals and bakery products were notable last year. The food at home (grocery store food) index advanced 4.5 percent, while the food-away-from-home (restaurant food) index advanced 2.3 percent.