CHAPEL HILL – A UNC economist said Friday that high gas prices could indicate that inflation is still an issue—which might mean that the Federal Reserve will raise interest rates.

In a webinar hosted by the Kenan Institute, Chief Economist Gerald Cohen reviewed data about US retail gas prices and inflation data.

“The one price that we see almost every day are gasoline prices,” said Cohen. “Expectations of inflation, at least short term, are very sensitive to gasoline prices.”

Graph showing correlation between gas prices and inflation | Provided by Kenan Institute of Private Enterprise

Cohen shared that there’s a 74% correlation between the changes in gasoline prices and the changes in overall inflation.

USA Today wrote last month that gas prices were soaring to a 10-month high, likely due to rising oil costs, summer energy demands, and concerns about the upcoming hurricane season.

Gas prices are only one data point among many, Cohen said, but he expects the Fed are keeping a very close eye on inflation data.

The Fed has been saying, ‘Look, inflation is coming down, we have to be less concerned,'” said Cohen. “Now, this is going in reverse, which is a big challenge for the Fed.”

Cohen shared predictive models to show what could happen next — with the blue line showing that the Fed may lower rates if inflation falls, and the orange line showing that the Fed may keep rates higher for longer if inflation doesn’t fall | Provided by Kenan Institute of Private Enterprise

The Fed will share its next interest rate announcement on September 20 at 2 pm ET.

‘Holding firm’ on recession call

Another datapoint Cohen is tracking—revisions to the US jobs reports.

Last Friday, the US Bureau of Labor Statistics revised its June report (which was released in July) and its July report (which was released in August, according to the Bureau’s press release from last Friday.

“The numbers for July and August were revised down substantially, by a net 134,000,” said Cohen.

And Cohen says these downward revisions could indicate a looming recession.

“The reason why it matters is because the Bureau of Labor Statistics is using some estimates for their job numbers,” said Cohen. “Those estimates tend to be cyclical, so, as the economy goes from recession to expansion, they tend to underestimate job creation. And then when the economy goes from expansion to contraction, they tend to overestimate job creation.”

Cohen noted that for the last eight months, there have been downward revisions—and that the last time that occurred was during a recession.

“This is one of the reasons why I’m holding firm on my recession call,” said Cohen.