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On the radar: Falling gasoline prices in March likely to distort seasonal adjustment of energy costs in March price indexes

Something to keep in mind before the release of the March Final Demand Producer Price Index at 8:30 ET on Thursday and the Consumer Price Index at 8:30 ET on Friday – it is normal for gasoline prices to be on the rise between February and March. However, this year oil prices have declined sharply in recent months contrary to the usual pattern. As a result, gasoline and other energy costs are going to drag down the energy component in the seasonally adjusted prices indexes and it is likely to be exaggerated by the size of the fall in prices. The EIA weekly average for regular gasoline started out at $2.423 in the March 2 week and landed at $2.005 as of the March 30 report, a steep drop of 41.8¢ over the course of the month.

Moreover, this is probably going to be especially noticeable when the April data is released. April sees the annual switchover to the summer gasoline formulation that are mandated by May 1. Prices of regular gasoline slipped another 8.1¢ per gallon to $1.924 as of April 6 and was the lowest since $1.841 per gallon in the March 7, 2016 week.

As a footnote, prices this low for gasoline normally lead to an increase in consumer spending related to improved discretionary incomes. However, massive job losses – however temporary – and the need to preserve cash along with stay-at-home orders will keep consumers out of stores and minimize any rollover to online spending for nonessentials. In any case, not only will the dollar value of sales at service stations decline due to lower prices, but lower volume of sales will further reduce that component of retail spending for March when the numbers are reported at 8:30 ET on Wednesday, April 15, but also extend into the April report.

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