Fueling Fears
Can the economy withstand $3-a-gallon gasoline?
Inflation watch. White's experience is typical. Last week, two key gauges of inflation showed that prices are rising at both the retail and wholesale levels, further diminishing consumers' buying power. The closely followed consumer price index is now up 3.2 percent over the past 12 months, largely because of a 14.2 percent increase in consumer energy costs. While the overall rate of inflation is in line with historic averages, it's still above last year's 2.7 percent.
Despite paying more at the pump, consumers haven't really changed their behavior much. According to a survey by CNW Marketing Research, consumers say high gas prices are their biggest concern. Yet only 3 percent say they have cut back on weekend travel or vacations. And only 13 percent have started to reduce the total miles they drive to save money.
Part of it may be that consumers spend far less, overall, on energy bills than they did in the past. Economy.com's Zandi says the average household spends 6 percent of its budget on energy costs, which includes gasoline, utility bills, and home heating. While that's up from around 4 percent in early 2002, it's still well shy of the nearly 10 percent spent on energy in the early 1980s.
Another reason consumers may not be changing their behavior significantly is that other economic signs look strong. The labor market is strengthening, albeit in fits and starts. Corporate profits are expected to have grown nearly 12 percent in the second quarter from last year, well above forecasts of single-digit gains (and they're expected to grow more than 13 percent in the third and fourth quarters). The manufacturing sector is actually performing better than expected. And household net worth, thanks to the booming housing market, has grown more than 8 percent over the past year. It could also be a case that "the consumer is looking at this and saying, 'I don't think these prices will last,' " says National City's DeKaser.
In fact, many economists expect prices at the pump will ease somewhat after Labor Day, when gasoline demand typically falls. Last week, crude oil prices briefly saw their biggest dip in four months as investors took profits on mixed news from the government on oil inventories. (It takes two to four weeks for such a drop to register at the pump.)
Still, most analysts don't think oil prices will fall to 1990s levels anytime soon. The oil spikes of the 1970s were caused by short-lived supply disruptions. But this run-up is due to an increase in demand worldwide, particularly in Asia. "Sixty-dollar crude is a realistic number mainly because of the incredible economic growth we've been able to have with oil prices at these levels," says Phil Flynn of Alaron Trading. "The economy can afford these higher prices."
For now, perhaps. The question is, for how much longer?
Pumped-Up Prices
The cost price of a gallon of regular unleaded regular gasoline is nearing 1981's record of $2.95.
[labels]
$1.79 Yearly average
$2.55 Last week's average
1970
'75
'80
'85
'90
'95
2000
'05
0
.50
1.00
1.50
2.00
2.50
$3.00
Prices are yearly averages through 2004.
Adjusted for inflation, prices are in 2005 dollars.
Source: Energy Information Administration
Stephen Rountree-- USN&WR
advertisement
