Iran’s reopening of the Strait of Hormuz to tanker traffic has pushed oil prices lower, and with that U.S. gasoline prices dropped from $4.61 per gallon during the week ending May 25 to around $3.91 today.
Sounds like an achievement, but before tensions in the Middle East, gasoline prices were closer to $3 per gallon. Hence, President Trump’s frustration with the pace of the decline has grown, calling on gas station chains to lower prices to $2.50 per gallon despite crude oil trading around $68 per barrel.
What’s stopping prices from returning to prewar levels?
For starters, crude oil accounts for only about 51% of the retail price of a gallon of gasoline in the United States, while refining, transportation, taxes, and retailer margins all make up the rest, and none of these is likely to be cut any time soon.
Then there’s the timing issue. The gasoline being sold today was produced from oil purchased weeks earlier, so prices at the pump don’t adjust immediately. Retailers raise prices quickly when they expect higher costs but lower them more slowly to recover losses. On top of that, consumers have gotten used to higher prices, which allows gas stations to maintain higher margins for longer.
Seasonality is another factor. Summer gasoline is more expensive due to stricter environmental standards and additives that reduce evaporation in hot weather, increasing costs and keeping prices higher through spring and summer.
But let’s assume gasoline prices fall to Trump’s target over the next month. Would that be enough for the Fed to return to rate cuts this year?
Higher input costs have already been passed through supply chains, and companies are slow to reverse price increases. Airlines, for example, are still adjusting to recent cost shocks, so near-term fare cuts are unlikely.
Inflation is also being held up by other factors, such as import tariffs and ongoing semiconductor shortages driven by the AI boom.
And the FOMC appears to share the same view, now expecting inflation to hit 3.6% in 2026 instead of 2.7%, while core inflation was lifted from 2.7% to 3.3%, and the 2027 forecast also moved up from 2.2% to 2.5%.
In conclusion, cheaper gasoline may help ease headline inflation, but on its own, it is unlikely to be enough to convince the Fed that inflation is under control.
