Gas Prices on the Rise! Surprised? You Shouldn't Be!

According to the AAA, the national average price for a gallon of regular unleaded gasoline has risen from $2.86 less than two months ago to $3.06 today. What is going on? Traditionally, gasoline prices fall after the summer driving season and bottom out in mid-winter. Why then have prices been going up?  The answer is QE II. No, not Her Majesty the Queen of England but the second round of quantitative easing undertaken by the Federal Reserve.

On November 3rd, the chairman of the Federal Reserve, Ben Bernanke, announced that the Fed would begin buying long-term Treasury bonds from the government in an operation called quantitative easing in order to increase the money supply and thus spur the lagging economy. Since this was the second time the Fed was trying this, it was dubbed QE II. But where does the money to buy the bonds come from? The answer is nowhere or in other words right out of thin air! The news media sometimes refers to this as "printing money" but in reality, the Fed doesn't actually print the money it just changes the balance in its checkbook and ... poof, like magic, more money. Don't we all wish we could do that!

Wait! What does this have to do with the price of gasoline? Glad you asked! Gasoline is one of the most price sensitive commodities so the price of gasoline gives us the first signs of inflation. But how does the increase in the money supply cause inflation? Another excellent question! A rise in the general price of goods and services is what most of us understand as inflation. However, this doesn't tell the whole story because it doesn't give us the how or why. Inflation occurs when more money chases the same amount of goods and services. Therefore, the value of money decreases and consumers have to pay more for the same items.

In June of 1980, under Jimmy Carter, the misery index (unemployment rate + the rate of inflation) peaked at nearly 22 and it is currently hovering around 11. (http://www.miseryindex.us/) Will one of the legacies of this flailing presidency end up being a return to a Carter-era misery index level? With the help of this Fed and its chairman, it just might!