One way to adjust gasoline prices for inflation is to measure the price over time in terms of the number of minutes worked at the average wage to purchase a gallon of gas. Using the monthly nominal price of gas from the EIA, and the average hourly wage from the BLS via the St. Louis Fed, the chart above shows the cost of one gallon of gas at the average retail price measured in the number of minutes of work at the average hourly wage each month from January of 1980 to November 2008.
For example, when real gas prices peaked in 1981, it took almost 12 minutes of work at the average hourly wage of $7.29 to purchase a gallon of gas at the retail price of $1.42. When real gas prices bottomed out in early 1992, it only took 4.15 minutes of work at the average hourly wage of $13.30 to purchase a gallon of gas at the average retail price of $0.92. By June 2008, when gas was selling for $4.05 per gallon, it took 13.5 minutes of work at the hourly wage of $18 to purchase a gallon of gas.
Now that the national average price of gas has fallen to $1.99 per gallon (data here), it only takes 6.5 minutes of work at the average hourly wage of $18.25 (estimated) to purchase a gallon of gas, the lowest real price of gas since February 2004 (when gas was $1.65 and the average wage was $15.54), and about 50% of the cost in the early 1980s. And now that the price of gas has fallen to as low as $1.39 per gallon at some Kansas City stations (data here), it only takes 4.57 minutes of work there to purchase a gallon of gas. The last time the average price of gas nationally was that low was February 2002, almost 7 years ago!
The Federal Highway Administration reported Thursday that travel during September 2008 on all roads and streets fell by -4.2% compared to September last year. This drop follows the 5.6% August decline, which was the largest ever year-to-year decline recorded in a single month. Further, September marks the eleventh consecutive month of traffic volume decline compared to the same month in the previous year. Travel YTD through September 2008 fell by -3.5% compared to 2007.
The eleven consecutive monthly declines (November 2007 through September 2008) in miles driven compared to the same month in the previous year is close to a record, and represents one of the most significant adjustments to driving behavior in recent history.
On a moving 12-month total basis, traffic volume in September fell to 2,917 billion miles, the lowest level in almost five years - since February of 2004 (see chart above), and this measure of traffic volume has fallen in each of the last 8 months.
Bottom Line: The moving 12-month total traffic volume in September 2008 (2,917.2 billion) is below the September 2007 level (3,006.4 billion) by 89.2 billion annual miles driven. At an average fuel efficiency of 20 m.p.g., and an average gas price of $3.42 per gallon over that period (data here), that reduction in miles driven represents an annual savings of more than $15 billion for American consumers and businesses.
That's in addition to the much larger $300 billion expected annual savings for consumers from the drop in gas prices from $4.12 per gallon to $2.00 since July (gas price data here), since American consumers and businesses save about $1.42 billion annually for every penny decrease in gas prices (see calculation here).
Thanks to John Thacker for the FHA update.