U.S. inflation cooled in February, with the Consumer Price Index (CPI) rising less than expected at 2.8 percent. Excluding food and energy, core CPI rose by 3.1 percent, as services costs such as shelter and transportation continued to grow at mid-single digits. What kept CPI growth muted was the ongoing fall in energy prices around the world.
Just as rising energy prices—fueled by the supply shock of the war in Ukraine—drove inflation in 2022, the fall in energy prices has been the biggest driver of the decline in overall inflation in recent months. Specifically, the gasoline component of CPI fell by 3.1 percent in February, while the fuel oil index fell by 5.1 percent. This decline reflects a longer term trend.
Since inflation’s peak in June 2022, the price of oil has fallen by nearly 45 percent (from $102 to $66 per barrel). At the same time, the national average U.S. retail price for gas has fallen by over 37 percent, from over $5.10 per gallon in June 2022 to $3.20 today. Still, prior to the COVID-era, gas prices were yet a third less, averaging around $2.25 between 2016 and 2020.
Rising oil prices can result from increased demand or decreased supply. If prices move too high or too fast, they can lead to slowing economic activity, and they can also be a driver of future inflation. Since oil is an input into every other part of the modern economy, when oil prices rise too far too fast other producer and consumer prices follow suit, and demand falls.
The United States should emphasize support for its domestic oil and gas industries. By reducing its dependence on foreign sources of energy, the United States better protects its strategic interests. By increasing domestic production of fossil fuels, retail prices should continue to fall. So long as prices are falling because of increasing supply, rather than weakening demand, falling oil and gas prices are an economic blessing.
As prices fall, the United States has opportunity to refill the U.S. Strategic Petroleum Reserve (SPR) at lower prices. In January 2021, the SPR held over 638 barrels of oil, near its practical capacity. Over the past four years, over 300,000 barrels, nearly half of the SPR’s total capacity, was sold off in an attempt to lower prices at the pump. The effort at price controls failed, and came at the cost of our national security. In January 2025, the SPR remained below 400,000 barrels. We can expect the U.S. government to replenish it, but will likely do so slowly and wait for prices to fall further.
Too high of oil prices are costly on the economy, but rapidly falling oil prices aren’t necessarily a positive signal. Like Goldilocks and the three bears, we need an economic porridge that is neither too hot nor too cold.
