Demand for electricity has surged, and so has the price.

By Wolf Richter for WOLF STREET.

Americans spend a lot of money on gasoline, and gasoline prices have plunged off the horrendous spike that peaked in mid-2022 and then zigzagged lower, but remain substantially higher than before the pandemic. The plunge in gasoline prices over these years was a substantial contributor to the cooling of overall CPI inflation.

But that’s not the case for the two other major energy costs that consumers pay for directly – electricity and natural gas piped to the home. Electricity costs have soared from record to record, and natural gas costs have risen substantially over the past 18 months.

The Consumer Price Index for electricity has surged by 6.7% year-over-year, and by 41% since January 2020. The price that households pay for electricity on their monthly bills – unlike the prices they pay for commodity-based fuels such as gasoline or natural gas – is not volatile. It’s largely set by regulated utilities that face no competition other than from rooftop solar installations. Monthly charges are a mix of fixed fees, service charges, and charges per kWh used. And they add up.

The surge in demand for electricity by AI data centers is now causing upward pricing pressures at some grid operators.

But that surge in demand is only a recent factor, largely in 2024 and 2025; that’s when the quantity of electricity generated began to surge, after spending 15 years in stagnation.

The chart below shows net generation of electricity in gigawatt-hours by utility-scale power generators (excludes rooftop solar). Per EIA data, generation in 2025 through October rose by 2.4% year-over-year. November and December 2025 are estimates. In 2024 and 2025 combined, net generation rose by 5.4%.

The AI-infrastructure buildout has only recently taken off, with many data centers not yet completed or not yet connected to the grid, and many more data centers being planned. The EIA estimates that demand for electricity will continue to surge in 2026 and 2027.

The CPI for natural gas piped to the home has surged by 10.8% year-over-year and by 54% since 2020.

The US has been the largest natural gas producer in the world for over a decade. Surging production triggered a natural gas glut around 2009 that caused the price of natural gas futures to collapse; and except for brief spikes, it remained low, most of the time between $2 and $4 per million Btu., despite the surge in natural gas exports, and increased demand from power generators (replacing coal) and industrial companies.

The price has recently fallen back into that range (currently $3.57 per million Btu). But that’s not the price that households pay their utilities.

Exports via pipeline and since 2016 via LNG have created lots of new demand. The US has become the largest LNG exporter in the world, and new export terminals have been coming on line every year. The US also exports large and growing quantities of natural gas to Mexico via pipeline. It also has a bilateral natural gas trade with Canada, importing more from Canada than exporting to Canada as some regions in both countries are not well connected via pipelines to their producing regions, such as New England, which gets most of its natural gas from Canada.

Growing exports, growing demand by power plants, and growing use by industrial users and as feedstock in the huge US petrochemical industry are piling a lot of demand on US natural gas production. So far, production growth has been able to keep up.

The price of gasoline has plunged off the peak of the spike in mid-2022. The average price for the US fell below $3 gallon in mid-December and by the weekly measure on January 12 had dropped to $2.91, according to EIA data. But that’s the average. In some states prices are a lot lower already; for example, Texans paid on average $2.45 per gallon and Coloradans $2.40, while Californians paid over $4.00 a gallon (the state is not connected via pipeline to other US oil producing regions).

The CPI for gasoline reflects the national average. In December, on a not-seasonally adjusted basis, it dropped to the lowest since April 2021, and was down 3.4% year-over-year (blue line).

Winter is usually the seasonal low-point, with driving season over the summer forming the high point. And the recent drops in the price were less than normal during this time of the year. So an a seasonally adjusted basis, gasoline had ticked up in the fall (red line).

This large drop in the price of gasoline since mid-2022 helped push down overall CPI.

The CPI for “Other fuels” (fuel oil, propane, kerosene, firewood, etc.) had spiked by 63% from January 2020 through mid-2022, and then gave up a portion of that spike. It remains 29% higher than in January 2020. Year-over-year, the index is up 1.2%:

All combined, the overall energy CPI that tracks the above categories of energy that consumers pay for directly has flattened out for the past three years at very high levels, with falling gasoline prices (accounting for nearly half of the overall energy CPI) roughly balancing out the rise of electricity prices.

Inflation is the rate of change of prices. And the rate of change of energy prices has cooled, due to the drop in gasoline prices. In December, the energy CPI was up by 2% from a year ago. But it remains high, up by 29% from January 2020.

 

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how:

WOLF STREET FEATURE: Daily Market Insights by Chris Vermeulen, Chief Investment Officer, TheTechnicalTraders.com.