Why Gas Prices Are the Leading Driver of Our Current Inflation

As things currently stand, the U.S. economy is facing inflationary pressures we have not seen in some 40 years. Prices on everything have gone up over the last 18 months. Inflation has been especially profound since the start of 2022, and gas prices are a big part of it. In fact, gas prices are the leading driver of our current inflation.

The average price for a gallon of gasoline at the start of 2021 was $2.25. We’ve more than doubled that today. At last count, the average price across America was over $5.00. Prices are even higher for diesel. That makes a difference because the big rigs that carry goods across the country run on diesel fuel.

Everyone Pays the Price

Getting products from manufacturer to end user involves a complicated logistics process. There are many players in the pipeline. Manufacturers sell to distributors; distributors sell to wholesalers; wholesalers sell to retailers; retailers sell to you and me. With every sale the goods in question need to be transported.

Here is the thing: everybody needs to pay the price for more costly gas. The insidious part of all is that the cost of fuel gets marked up along the way. In other words, all the players in the logistics chain are making a profit from higher gas prices.

Product Markup

Imagine you are a retail store owner. You can purchase Product A from your wholesaler at $10 per piece. Being a wise business owner, you apply a 40% markup to sell that product in your store for $14. Fine. But where did the wholesaler’s $10 price come from? That $10 covers the wholesaler’s profit along with all its costs – including fuel. You are not just marking up the product.  You are also marking up fuel costs.

Guess what? Your wholesaler did the same thing. So did the distributor and manufacturer. By the time the product makes it to your shelf, your customers are bearing the entire cost of increased fuel prices plus profit for every player in the logistics chain.

International Ecommerce, Too

What we are talking about is not limited just to the U.S. E-commerce operators who ship overseas mark their products up as well. Using our previous example, your $14 price remains the same even though you ship to Canada and Europe. But now you need to add in shipping costs. Those are higher these days because fuel is more expensive.

Preferred Shipping, a Texas company that offers international shipping as well as DHL Shipping, DHL International Export Express and other DHL services, says the cost of shipping worldwide has only gone up over the last year and a half. Higher shipping costs are driving up retail prices everywhere.

Supply Chain Issues

The icing on the cake is the supply chain issues higher fuel prices are causing. Trucks are being idled because companies cannot afford to run them. Shipping crates are being sent half empty as exporters cannot afford to send their products overseas. The end result is a disrupted supply chain. That only drives prices higher.

The inflation we are currently seeing has not been seen in this country since the late 1970s and early eighties. How interesting that the last time this happened, fuel prices were also going through the roof. History has a way of repeating itself, doesn’t it?

High fuel prices are driving the current inflation. Bring fuel prices down and inflation stops. Will that happen? Nobody knows. For the sake of average Americans, here is hoping someone with the ability to do something actually does.