Forecasting gasoline prices in the presence of Edgeworth Price Cycles

- We study how to forecast gasoline prices in markets with Edgeworth Price Cycles.
- We find that cycle troughs are predictable using simple purchase timing rules.
- Consumers can systematically save the equivalent of 15 U.S. cents per gallon.
- Results are based rolling predictions using only past and known information.
- Best updating algorithm is also the simplest - do this time what was best last time.

Forecasting is a central theme in economics. The ability to forecast prices enables economic agents to make optimal decisions for the present and future. In this article, we investigate if and how gasoline prices can be forecast in retail gasoline markets that are subject to high-frequency, asymmetric price cycles known as Edgeworth Price Cycles. We examine a series of purchase timing decision rules and a series of feasible forecasting algorithms for updating those rules over time. We find that, in the presence of cycles, agents in our five Australian markets can systematically reduce purchase prices below market average the equivalent of 11 to 15 U.S. cents per gallon, using simple decision rules and feasible forecasting algorithms.