Experts Break Down Recent Surge in Gas Prices — What It Means for Inflation

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Gas prices at the pump continue to climb as we enter the dog days of summer. Today’s national average for regular unleaded gas sits at $3.82, according to AAA.com, a two-cent increase from Wednesday, August 2, 2023.

While it’s normal for gas prices to creep up over the weekend, the price today is also significantly higher than one month ago, when the average price for regular unleaded was just $3.53.

The past 48 hours have brought a 9-cent spike in prices at the pump, the biggest increase since June 2022.

In retrospect, we’ve come a long way from last summer’s average price of $4.16. But why are we experiencing a spike right now?

Reasons Behind Rising Gas Prices

AAA.com points out that prices have risen primarily due to the price of oil and July’s extreme heat, which drove up demand. General optimism about the economy has also put more people on the road for vacations and day trips, increasing fuel demand. Coupled with supply cuts by OPEC and Russia, the U.S. faces a perfect storm driving gas prices up.

But, AAA experts say it’s set to turn around soon.

“Last month’s extreme heat played a role in the recent spike in gas prices due to some refineries pulling back, but now operations are getting back to normal,” Andrew Gross, AAA spokesperson, said in a AAA blog post. “Coupled with tepid demand and declining oil prices, this may help take the steam out of the tight supply price jolts we’ve seen lately.” 

How the Rise in Wheat Prices Could Cause Problems for the Economy

However, if gas prices don’t begin to moderate quickly, it could spell trouble for the “soft landing” the U.S. Federal Reserve has been hoping for. The rising gas prices have combined with a rally in wheat, grain, and other agricultural commodities, CNN reported. Wheat futures rose to a five-month high this week due to the War in Ukraine and Russian attacks on Ukrainian ports and agricultural facilities.

Rising fuel costs plus rising prices for agricultural commodities could spell another interest rate hike on the horizon.

Gas prices at the pump affect many aspects of inflation, since higher gas prices make it harder to transport goods, including crucial items like food and luxury items, whose purchases foster retail confidence and economic growth.

The Fed raised interest rates by 25 basis points, once again, at their most recent Federal Open Market Committee meeting on July 26, 2023. Some predicted this would be the last rate hike for some time, but Federal Reserve Chair Jerome Powell suggested a wait-and-see approach.

However, if gas and wheat prices continue to climb, another rate hike could be on the horizon for September.

“Higher commodity prices could mean higher rates,” Francisco Blanch, a commodities and derivatives strategist at Bank of America, wrote in a note reported by CNN.com. “A spike in commodity prices could reignite a run-up in interest rates and restart the battle between oil and money.”

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