Ratchet effects

Weekly Updates

Economists are dynamic people who focus on change. Consumers (and voters) tend to focus on levels, especially price levels. US consumers remember the pre-war sub USD 3 per US gallon gasoline price level, and consider it the “fair” price. Even as gasoline prices fall, the current level remains far above the “fair” level—creating political consequences.
Refined oil prices will follow crude oil futures lower with a lag. Consumers expect petrol price declines and will rebel if they do not get them. Other businesses (from Amazon to Chicago taxicabs) imposed wartime “oil surcharges.” Surcharges are a very visible way for companies to say “it’s not our fault,” but if the reason for the surcharge disappears, so must the extra cost.
Other price rises may stick. US President Trump’s wave of tariffs in 2025 quickly passed to US consumers. When those tariffs were declared unlawful, there was little evidence of price increases being reversed. Some of this reflected fears of a new wave of tariffs, but if consumers accepted the price increase, why give it back?
Oil-driven price increases in core (ex-food and energy) inflation like airfares are less visible. Further price increases are unjustified, but companies that passed on past oil costs via higher headline prices may try and cling to existing levels.