Posts Tagged ‘Gas prices’

Gas Prices Coming Back to Earth

Tuesday, May 1st, 2012

After rising steadily for four months, gas prices at last seem to be stabilizing. Suddenly, pump prices have fallen six cents over two weeks to a national average of $3.88.  Experts say gasoline could fall another nickel or more in the immediate future.  Drivers might also get to say something they haven’t since October 2009 — they’re paying less for gas than they did last year.

“It’s nice, much more manageable,” said Mark Timko, who paid less than $4 per gallon recently in Burr Ridge, IL, a Chicago suburb, for the first time since March.  “I wasn’t sure how high they were going to go this year.”

Gas prices are lower than they were a year ago in 11 states, according to the Oil Price Information Service.  At $3.88, the national average is still costly, but it’s less than the peak of $3.94.  Predictions of $5 gasoline have  — thankfully evaporated.

Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, believes that gas prices will drop to a national average of just above $3.80 soon.  Stuart Hoffman, chief economist at PNC Financial Services Group, said declining prices will put more money into the economy that Americans can spend on other things.  A 10-cent drop in gas prices means drivers have an extra $37 million per day.

Stabilizing crude-oil prices and “sufficient supplies” of gas have led to the price decline, Trilby Lundberg, president of Lundberg Survey, Inc., said.  The drop was the first in Lundberg’s twice-monthly surveys since December. The costliest gas in the lower 48 states was in Chicago, where the average was $4.26 a gallon, Lundberg said.  The cheapest price was in Tulsa, where customers paid an average of $3.52 a gallon.  “We can thank crude oil for allowing gasoline to do what it has been wanting to do for weeks, which is drop,” Lundberg noted.

The price of gas is becoming an issue in the 2012 presidential election.  President Barack Obama urged Congress to boost federal supervision of oil markets, including larger penalties for market manipulation and greater power for regulators to increase the amount of money traders must put up to back their energy bets.  “We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick,” Obama said.  Mitt Romney, the likely Republican nominee, has accused the Obama administration of disrupting domestic oil production with regulations.

The Energy Information Administration weekly report noted that the nation’s crude oil stocks rose for the fourth straight week by 3.9 million barrels to 369.0 million barrels, better than anticipated.  Gas stocks fell by 3.7 million barrels to 214.0 million barrels.  Demand for gas saw a relatively small retraction of 103,000 barrels per day (bpd) to 8.681 million bpd.  Demand in the same week in 2011 was 500,000 bpd higher.  The four-week demand average for gas is still falling somewhat and currently stands at four percent.  Gas demand of 8.775-million bpd represents a 94,000 bpd increase, but reflects a 288,000-bpd drop from the same week last year.  The four-week moving average shows gas demand destruction of 2.8 percent; and the year-to-date numbers imply about 5.9 percent lower consumption.  Analysts can split hairs about actual motor fuel demand, but it is clearly lower than last year,

“April has seen more days of gas price declines than any month this year, which has motorists and analysts alike wondering if a gas price break is under way,” said Martha M. Meade, Manager of Public and Government Affairs for AAA Mid-Atlantic.  “While several factors influencing crude oil prices remain in play, some analysts believe gas prices will continue to retreat and sometime in the next ten days or so we could be paying less at the pump than we were a year ago.”

Americans may be mending their gas-guzzling ways, according to the Washington Post. According to Steven Mufson, “As prices have neared and in some cases topped $4 a gallon, drivers have cut their consumption of gasoline to its lowest levels in a decade, driving less and buying cars that are more fuel-efficient.  The adjustment has slowed the climb in gasoline prices, which until last week had risen for 10 consecutive weeks, and could preserve some money for Americans to spend on other items as the economy struggles to recover more convincingly.  In the Washington area, there has been an increase in applications for carpooling under the Commuter Connections program, which links people seeking to share rides. Applications rose 20 percent last year and 10 percent in January and February, in each case closely tracking the increase in gasoline prices, according to Ronald Kirby, director of the department of transportation planning for the Metropolitan Washington Council of Governments.  The response to $4 gasoline is reinforcing a trend toward lower fuel consumption.  This will be the third year in the past five with historically high oil prices. Even before the latest price spike, gasoline consumption had dropped six percent from 2007 through 2011, the Energy Information Association (EIA) said.  The Federal Highway Administration adds that the number of vehicle miles driven over a 12-month period ending January was lower than in any year since 2004.”

Gasoline purchases totaled four percent of total consumer spending in 2011, noted Mark Zandi, chief economist of Moody’s Analytics.  That’s more than the 2.3 percent recorded when crude oil prices crashed in 1998, and significantly less than the six percent level in 1981 when an oil price shock shook the economy.  “I’ve been surprised, at least so far, that $4 a gallon hasn’t done more damage,” Zandi said.  “So far, it doesn’t seem to have done any.”  According to Zandi, the improving job market is one reason.  Another is that the warm winter reduced people’s heating bills and evened out total household energy costs.

Let’s Go Shopping!

Tuesday, April 24th, 2012

Despite rising gas prices, retail sales in the U.S. rose 0.8 percent in March, proof that consumers are still filling up their tanks, according to economists.  The rise in purchases follows a 1.1 percent increased in February that was the biggest in five months, according to a survey of 71 economists.  The gain sent retail sales to a record high of $411.1 billion, 24 percent higher than the recession low hit in March 2009.  “Retail sales are going to end the quarter on a positive note,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc.  “Underlying job growth is decent.”

Sales may have been helped by the unusually warm weather. The average temperature was 51.1 degrees Fahrenheit, the warmest on record for the month in the past 117 years, according to the National Oceanic and Atmospheric Administration.  The economy expanded “at a modest to moderate pace” from mid-February through late March as manufacturing, hiring and retail sales strengthened, according to the Federal Reserve’s latest Beige Book report.  The central bank is maintaining its benchmark interest rate near zero until late 2014 to encourage economic expansion.

Americans spent more on building materials, cars, electronics, furniture and clothing in March.  A separate Department of Commerce report showed that American companies restocked at a steady pace in February, which suggests that businesses expect consumers to continue spending this spring.  The retail sales report is the government’s initial monthly look at consumer spending, which represents 70 percent of economic activity.  The increase, along with other positive data on inventories and trade, suggests growth in the January-March quarter could be stronger than first thought.  Economists are estimating growth at an annual rate of between 2.5 percent and three percent in the 1st quarter, which is in line with the annual pace reported for the October-December quarter.  Americans are feeling greater confidence in the economy after seeing hiring strengthen over the winter.  Job gains were typically 246,000 per month from December through February.

In terms of cars, “The industry and consumers have been very resilient in the face of higher pump prices,” Don Johnson, vice president of U.S. sales at General Motors, said.  “The steadily improving economy is playing a role and so is pent-up demand and an improved credit market.”

Corporate stockpiles rose a seasonally adjusted 0.6 percent, according to the Commerce Department. That’s less than January’s upwardly revised gain of 0.8 percent. The increase pushed stockpiles to $1.58 trillion which is nearly 20 percent more than the recent low hit in September 2009, just after the recession ended. Sales grew faster than inventories in February, rising 0.7 percent.  This is a good sign because it is evidence that companies aren’t building too much inventory, which can result in cutbacks in production in the future.

“The pace of inventory building is consistent with what you’d expect to see in a gradual expansion,” said Tim Quinlan, an economist at Wells Fargo.  Businesses are rebuilding their stockpiles after cutting them over the summer in fear of a double-dip recession.  Steady inventory growth in the 1st quarter, as well as a narrower trade deficit in February and stronger retail sales, has lifted the outlook for growth.

American households “have the income to propel their purchases now that we’re seeing job growth,” said Russell Price, senior economist at Ameriprise Financial Inc., the third- best forecaster of retail sales for the 24 months ended in March.  “They have adjusted to the higher price of fuel.  The economy now needs to build on its own momentum.”

Retail Sales Are on the Rise

Monday, April 2nd, 2012

February retail sales climbed the fastest in five months. Even rising gas prices didn’t dampen demand for cars, clothing and other goods.  According to the Commerce Department, retail sales rose a seasonally adjusted 1.1 percent to $407.8 billion in February; January retail sales were revised upwards to show a 0.6 percent rise instead of the initially reported 0.4 percent.  If you don’t count cars, sales climbed 0.9 percent.  Economists queried by MarketWatch had anticipated a 1.2 percent gain for the headline index and a 0.7 percent advance for retail sales, not counting autos.

Consumers are “unfazed by higher gas prices,” said Jonathan Basile, an economist at Credit Suisse, who accurately forecast the increase in spending.  “This is a pleasant surprise on the overall picture for the economy.  For the Federal Reserve, it’s steady as she goes.  They will be encouraged, but there is still a long way to go.”

Gourmet-cookware chain Williams-Sonoma Inc., said demand improved at the start of the year following the holiday shopping season.  “Post holiday, we saw a progressively stronger retail environment,” said Laura Alber, the company’s chief executive officer, which reported record earnings for 2011.  Sales increased 1.6 percent at automobile dealers, reversing the previous month’s decline.  The results fell short of what the industry expected.  Cars in February sold at the fastest pace in four years, led by Chrysler and a surprise gain from General Motors. Light-vehicle sales accelerated 6.4 percent from January to a 15 million annual rate, the strongest since February 2008, according to Ward’s Automotive Group.

“There are a number of factors that are helping release this pent-up demand,” said Don Johnson, vice president of GM’s U.S. sales.  “They include stronger employment, good credit availability, and both of those are leading to improving consumer sentiment.”

Clothing store purchases rose 1.8 percent, the most since November 2010.  Furniture and general merchandise stores were the only categories to show a decrease in sales.  An improved employment and income picture are giving consumers the confidence to spend more. This is demonstrated by the fact that the Bloomberg Consumer Comfort Index rose to an almost four-year high in the week ended March 4.

Employers boosted payrolls more than forecast in February.

Dean Maki, chief U.S. economist at Barclays Capital Inc. and a former Fed researcher who specialized in consumer spending, projects Americans will boost purchases at a three percent yearly rate in the 2nd half of the year after a 2.5 percent gain in the first six months.

Federal Reserve policymakers are likely to retain their plan to keep interest rates low at least through late 2014.  Chairman Ben S. Bernanke said maintaining monetary stimulus is warranted even with employment gains and a lower jobless rate.  While there are “some positive developments in the labor market,” Bernanke said, “the pace of expansion has been uneven.” The rise in gas prices “is likely to push up inflation temporarily while reducing consumers’ purchasing power,” he said.

“We believe that the consumer is in better shape than recent downbeat commentary from Fed Chairman Bernanke,” said John Ryding and Conrad DeQuadros, analysts with RDQ Economics. Another Commerce Department report showed U.S. companies restocked at a faster rate in January, a sign that businesses expect stronger job growth to fuel more sales.  Business stockpiles rose 0.7 percent in January, while sales grew 0.4 percent.  For the remainder of 2012, JPMorgan Chase analysts forecast growth of 2.2 percent, an improvement from the 1.7 percent growth seen in 2011.

The rise in sales “signals that the improving economic fundamentals, particularly strong employment growth, are being translated into higher spending activity,” said Millan Mulraine, senior macro strategist at TD Securities. “This building momentum is especially encouraging for the recovery as it suggests that the self-reinforcing positive dynamics between jobs growth and spending activity could foster a more robust economic recovery in the coming months.”

Rising Gas Prices Send Americans to Mass Transit

Monday, March 19th, 2012

American public transportation ridership rose 2.3 percent last year as gas prices rose to their highest-ever annual average, according to the American Public Transportation Association (APTA).  The 10.4 billion trips recorded last year was the highest since 2008, when gas prices hit more than $4 a gallon nationwide for seven weeks in the summer.

APTA said economic recovery, that sees more Americans commuting to and from work, added to ridership.  Approximately 60 percent of commutes are for work.  Greater use of smart-phone apps, which “demystify” schedules for riders, also boosted ridership, the APTA said.  Increases in public transportation were reported in communities of all sizes and among light rail, subway, commuter train and bus services, the APTA said.  The largest increase — 5.4 percent — occurred in rural communities with populations of less than 100,000, said Michael Melaniphy, APTA’s president and chief executive.

Spending on public transport totals in the region of $50 billion a year, Melaniphy said.  Funding for public transportation is split nearly 50/50 between federal dollars from the gas tax, money from state and local property and sales taxes, and ridership fees.

In Boston, where unemployment has fallen two percent since the beginning of 2010, ridership rose four percent last year to an average of 1.3 million passenger trips a day on weekdays, said Joe Pesaturo, of the Massachusetts Bay Transportation Authority.

Because of the recession, transit agencies were forced to operate more efficiently and better care for existing systems and equipment, said Robert Puentes, senior fellow in the Metropolitan Policy Program at the Brookings Institution.  That has resulted in better service.

In terms of specific modes of transit, light rail (including streetcars and trolleys) led with a 4.9 percent increase.  This was followed by heavy rail (subways and elevated trains) at 3.3 percent; commuter rail at 2.5 percent; and large bus systems at 0.4 percent.

It’s ironic that these increases occurred despite the fact that transit agencies have had to increase fares and decrease service because of budget cuts, according to Melaniphy. “Can you imagine what ridership growth would have been like if they hadn’t had to do those fare increases and service cuts?”

Economy Reaches Stall Speed

Tuesday, August 23rd, 2011

The American economy expanded at a snail’s pace of just 1.3 percent in the 2nd quarter, according to a report from the Department of Commerce. Growth in the first three months of 2011 was reduced to 0.4 percent from an earlier reading of 1.9 percent.

“Today’s first look at GDP in the 2nd quarter confirms what we already knew:  The economy isn’t growing as fast as it needs to,” said Commerce Secretary Gary Locke.  “Experts have repeatedly warned that if this uncertainty continues, our economy will pay the price.  We can’t afford to return to the same failed policies that brought us here.  We must build on the progress we’ve made over the last two years and reach a balanced compromise that will reduce our debt and at the same time strengthen our job-creating ability and global competitiveness for the future.”

Soaring gas prices and meager income gains caused consumers to limit their spending in the spring.  The abrupt slowdown means the economy in 2011 will likely grow at a slower pace than in 2010.  Additionally, economists don’t expect growth to pick up enough in the 2nd half to cut the unemployment rate, which rose to 9.2 percent In June.  Economists originally thought that a Social Security payroll tax cut would spur adequate growth to reduce the unemployment rate.  Unfortunately, the lion’s share of that money was spent filling up gas tanks as gas prices soared.  In an unfortunate twist, employers pulled back on hiring because Americans spent less.  Thanks in part to high gas prices, consumer spending was virtually flat throughout the spring.  It grew a mere 0.1 percent, after experiencing 2.1 percent growth in the winter.  Spending on long-lasting manufactured goods — primarily autos and appliances — declined 4.4 percent.

Usually reliable government spending fell for the 3rd consecutive quarter.  State and local governments also slashed spending, the seventh time in eight quarters since the recession officially came to an end.  Corporate spending on equipment and software grew 5.7 percent in the 2nd quarter, down from the 1st quarter’s impressive 8.7 percent pace and below 2010’s double-digit gains.  Additionally, American incomes are not growing.  After-tax incomes, adjusted for inflation, rose just 0.7 percent, similar to the 1st quarter and the weakest numbers since the recession ended.

Kathy Bostjancic, director for macroeconomic analysis at the Conference Board, said the poor new data could push the American economy back into recession.  Although she said that the chances of that are still low. “Anemic consumption, still declining state and local government spending, tepid business investment, and soft housing activity all combined to offset some strength in exports,” she said.  “Concerns about the weak labor market and rising food and energy prices continue to weigh on consumer confidence.”  In June, the Federal Reserve cut its estimate of economic growth for the year.  The Fed now thinks that the economy will grow between 2.7 percent and 2.9 percent, down from an April estimate of 3.1 percent to 3.3 percent.

The economy is struggling to recover from the recession that lasted from 2007 to 2009, a time when the GDP contracted.  According to a government report, the recession was even worse than originally estimated.  Between the last few months of 2007 and the middle of 2009, the economy declined by 5.1 percent.  That is one percentage point more than previous estimates.

Writing in the Washington Post’s “Political Economy” column, Neil Irwin says that “But even if the number comes in somewhat higher than economists are expecting, it will be no cause for celebration.  The U.S. economy is capable of growing at about 2.5 percent a year over the longer term, as the population increases and workers become more productive.  But when the economy grows at that rate, the labor market can only tread water — accommodating the rise in the labor force, but unable to put the millions of Americans still unemployed back to work.  So, what happens to employment when the nation’s economic growth stays below that 2.5 percent rate, as it has in the 1st half of this year?  The U.S. jobless rate has risen for three months straight.  Among the major culprits in keeping job seekers out of work are the financial struggles faced by state and local governments that are cutting tens of thousands of jobs and billions of dollars in spending each month to balance their budgets.  State and local government cutbacks subtracted 1.2 percentage points from 1st quarter GDP, the Commerce Department has estimated.  Friday’s GDP release shows the amount of drag in the 2nd quarter.  States were able to delay those cutbacks when they received hundreds of billions of dollars from the federal government in 2009 to ride out the recession.  That money has all been spent, and now states are being forced to slash spending and raise taxes to comply with balanced-budget requirements.  Congress has given little serious consideration to reviving the stimulus program.”

Some economists see the light at the end of the tunnel.  “The pace of fiscal retrenchment is likely to pick up in coming years,” said Jan Hatzius, Goldman Sachs’ chief economist, “and this year’s experience confirms our view that this adjustment is likely to weigh on GDP growth.”

As Global Oil Consumption – and Prices – Rise, OPEC Rejects Increased Production

Monday, June 20th, 2011

As gas prices seesaw up and down at the pump and Americans reluctantly pay more to fill their tanks as the economy slows, OPEC (the Organization of Petroleum Exporting States) could not agree on whether or not to increase production and provide some relief. The two key factors are Saudi Arabia and Iran. At an unusually contentious meeting, the 12-nation group could not reach agreement on new production targets.  That sets the stage for higher prices for oil and gas later this year as world demand for oil rises faster than supplies.  Saudi Arabia favored an increase in output, which likely would have translated to lower oil prices.  Other countries – such as Iran — resisted, arguing that oil supplies are adequate to meet demand and current prices are on target.  “We are unable to reach consensus,” OPEC Secretary General Abdullah Al-Badri said.  Saudi oil minister Ali Naimi called the meeting “one of the worst ever.”

Writing on the Salon website,Andrew Leonard points out that China is partially to blame for high prices at the gas pump.  According to Leonard, “If you want to know why gas prices are high, and why, in the long run, they will keep getting higher, all you need to do is peruse BP’s Statistical Review of World Energy 2011 report. Bottom line:  World oil consumption hit an all-time record high of 87.4 million barrels a day in 2010, driven by a surge in demand from emerging nations, but primarily led by China.  China has now overtaken the U.S. as the world’s largest energy consumer, with demand for all kinds of energy growing 11.2 percent in 2010.  In 2010, Chinese oil consumption grew by 860,000 barrels a day.  Since 2000, China’s oil consumption has grown an incredible 90 percent.  Supply, globally, is not keeping up with demand growth. And barring a major global economic meltdown, that dynamic is not going to change.  The rest of the world is going to continue to consume more oil, and finding and developing new sources of oil is going to continue to get more expensive.  And Obama can’t do a damn thing about it, except to put in place policies that encourage U.S. consumers to consume as little oil as possible.”

The Saudis and the Iranians frequently lock horns over pricing at OPEC meetings.  Typically, however, member nations follow Saudi Arabia’s lead, which produces most of the group’s oil.  This time the Saudi-Iranian rivalry resulted in a deadlock.  The International Energy Agency (IEA) had urged oil producers to put more crude on the market.  “Ongoing supply disruptions, as well as the fragile state of the global economy, call for a prompt increase in supply,” the agency said.  Iran, the second largest OPEC member after Saudi Arabia, is the leading price “hawk,” favoring expensive oil.  Saudi Arabia has consistently acted to moderate prices.

“Looking to the remainder of this year, the expected supply/demand balance indicates a tightening market,” OPEC’s report said. “As a result, global inventories could continue to decline as the market enters a period of high seasonal demand.”  OPEC’s member nations include Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

According to the IEA, demand for OPEC crude will average 29.95 million bpd (barrels per day)  in the 2nd half of 2011, or 1.2 million bpd more than April production of 28.75 million bpd.  Analysts said OPEC’s report had minimal impact on oil prices and a bigger focus would be the IEA’s latest forecasts.  “It’s absolutely market neutral,” said Olivier Jakob of Petromatrix.  “What’s going to matter more is the IEA report when we will be able to see if there are any more changes.”  OPEC’s May oil output rose by approximately 171,000 bpd to 28.97 million bpd as extra supplies from Saudi Arabia, Nigeria and Iraq offset declining production from Libya.  The report said Saudi output totaled 8.86 million bpd in May.  Saudi newspaper al-Hayat reported that Riyadh would boost supplies to 10 million bpd in July and oil traders said the kingdom was offering more to Asian customers, because they are driving the increase in global demand.  The world is expected to use 1.38 million bpd of oil more this year than in 2010, OPEC’s report said.

OPEC’s daily production is bound by quotas of 26.32 million bpd in May of 2011, according to the group’s monthly report.  That’s an increase from 26.17 million bpd in April, OPEC said.  Saudi Arabian output climbed to 8.86 million bpd in May, compared with 8.8 million in April.  OPEC’s total supply, including Iraq, was 28.97 million bpd May compared with 28.8 million the previous month.  Libyan supplies fell to 169,000 bpd in May as the conflict between forces loyal to Muammar Qaddafi and anti- government rebels halted output.  That compares with an average 1.56 million last year.  OPEC, which provides approximately 40 percent of the world’s crude oil, announced its biggest-ever supply cuts in late 2008 when the financial crisis caused a collapse in global demand.  The decision capped production at 24.845 million bpd for all members except Iraq, which is exempt from the quota system.

Now we are unhappy that we did not reach a decision but this is not the end of the world,” al-Badri said.”It was not political, it was really an economic situation.  Of course, for the past six years we have enjoyed a very relaxed atmosphere, now we have some tension.  I hope we will overcome it.”

High Gas Prices Sending Americans to Their Computers to Shop

Tuesday, May 17th, 2011

Online shopping grew at its fastest pace in nearly four years in April as soaring fuel prices sent Americans to their computers instead of the malls to shop on the internet instead, according to MasterCard Advisors.  Consumers spent $13.8 billion online in April, a 19.2 per cent increase over the same month of 2010, according to the SpendingPulse survey, which is based on spending using MasterCard credit cards and estimates of other forms of payment.  Mike Berry, MasterCard Advisors’ director of industry research, said “We’ve started to see demand distortion, with people pumping fewer gallons and driving less.”  Amazon.com reported sales had increased as much as 45 percent, while eBay reported a 10 percent rise.

In general, April sales trends are mixed, with some sectors showing continued year-over-year growth.  Others are flat or even negative, according to the report, which tracks sales across all payment methods.  A late Easter, which shifted some sales from March into April, may skew interpretations, although data suggests that high gasoline prices are impacting consumer behavior.  April marked the sixth straight month of double-digit growth in online shopping, according to Berry.  Online shopping has risen from 0.6 percent of all retail spending at the end of 1999 to 4.3 percent in the 4th quarter of last year, according to Census Bureau statistics.

We can expect consumers to make fewer shopping trips,  especially on weekends, and this may contribute to an ever stronger growth for e-commerce,” says Michael McNamara, vice president, research and analysis for SpendingPulse.  Several retail sectors saw online sale increases during April.  For example, online shoe sales rose 20 percent compared with 2010.  Women’s clothing rose by 15 percent, the second consecutive month to record that large an increase.  By comparison, clothing sales in actual stores rose 10.4 percent.  Consumer electronics purchased online grew 9.1 percent, for the eighth consecutive month of growth.  Electronics and appliance sales, including brick and mortar purchases, declined 1.8 percent in April.

Referring to continually rising gas prices, McNamara said,  “Our experience over the past several years suggests that this can have a variety of repercussions for retail.  First, we can expect consumers to make fewer shopping trips, especially on weekends, and this may contribute to an ever stronger growth for e-commerce.  Fewer miles driven also reduces demand for auto parts and services.  Finally, casual dining restaurants can be negatively impacted.”

Surprisingly demand also hasn’t yet been hurt by the sharp rise in gasoline prices brought on by the uprisings across the Middle East, according to Berry.  Still, he warns the trend bears watching as he expects that spending levels are only just starting to see the impact of soaring gas prices.  “We haven’t reached that point yet, but it is something to keep an eye on,” he said.

With Inflation on the Rise, Is the Era of Cheap Food Over?

Tuesday, April 19th, 2011

The long-feared specter of inflation is finally rearing its ugly head, as consumer prices rose by 0.5 percent in February, according to a report from the Department of Labor.  Take away food and gas prices and the increase was jut 0.2 percent.  “All signs indicate that, against the backdrop of a strengthening economy, inflation is beginning to heat up as well,” said Jim Baird, chief investment strategist of Plante Moran Financial Advisors.  The Department of Agriculture says that food prices could climb three or four percent in 2011.

Although core consumer prices have risen at the slow pace of 1.1 percent over the past year, they’ve also started rising more quickly in the past five months.  The Federal Reserve pays closer attention to the core rate when it determines interest rates and examining whether inflation is under control.  The central bank believes recent price increases are likely to prove temporary.  Critics of the Fed argue its looser-money policies have contributed to the price spikes.  “If core inflation continues to rise, while job growth remains slow and the U.S. expansion is threatened by developments in the Middle East and Japan, then the Fed will be in a very tight spot,” said Ellen Beeson Zentner, senior U.S. macroeconomist at Bank of Tokyo-Mitsubishi.

The lion’s share of the blame for renewed inflation is sharply rising energy prices, which soared 3.4 percent in February alone and represent an 9.8 percent increase over the last three months.  A gallon of gas has risen 50 cents in the first months of 2011, primarily a result of political unrest in countries such as Egypt, Tunisia, Libya and Bahrain.  The cost of food rose 0.6 percent in February and 2.8 percent in the last year, driven largely by global demand.  Prices for corn and wheat have soared to a two-year high; sugar prices have climbed to their highest level in 30 years.  Large-scale crop failures around the world have contributed to the spike.  Because these farm staples are used to feed livestock or are included in many packaged goods, the prices of many grocery items — ranging from chicken to cereal — have risen accordingly.  Housing prices, which constitute approximately 40 percent of the core Consumer Price Index, rose for the fifth consecutive month, by 0.1 percent.

For Americans, the return of inflation could signal the end of the era of inexpensive food. Typically, Americans have spent just 10 percent of their paychecks on food, compared with as much as 70 percent in some countries, particularly in sub-Saharan Africa.  Some economists are wondering if the nation’s cornucopia of affordable food is a thing of the past.  “Food prices have been rising a lot faster, because underlying costs have really shot up. You’re seeing some ingredients up 40 percent, 50 percent, 60 percent over last year,” said Ephraim Leibtag, a U.S. Department of Agriculture economist.  “When you see wheat prices close to 80 percent up, that’s going to ripple out to the public.”

Fierce weather patterns, which some scientists blame on climate change, are making the problem worse.  Unprecedented floods in Australia destroyed much of the wheat crop, while a drought threatened China’s.  “We’re not sure if these extremes in weather are the new normal,” said Clive James, founder of the not-for-profit International Service for the Acquisition of Agri-Biotech Applications.  “But the patterns we’ve seen in the past few years show that this may become more the rule than the exception.”

In nations where people spend 30 to 70 percent or more of their income on food, starvation is on the rise.  The World Bank has reported that as many as 44 million people have been forced into hunger because of rising food prices.  That has helped fuel the conflict in Libya and ousted leaders in Tunisia and Egypt.  “The situation is volatile and we’re at a point of transition,” said Abdolreza Abbassian, a grain economist with the United Nations’ Food and Agriculture Organization.

Latest CPI Numbers Show a Still-Shaky Economy

Monday, January 31st, 2011

Latest CPI Numbers Show a Still-Shaky EconomyRising gas prices and the dearth of jobs are negatively impacting consumer confidence and bringing the first hint of inflation in a long time.   The Consumer Price Index (CPI) showed an increase of 0.5 percent in December, primarily a result of skyrocketing gas costs, according to the Department of Labor.  The AAA reports that the average price of a gallon of gas has soared to $3.10 nationally, the highest since October of 2008.  According to a Thomson Reuters/University of Michigan study, the preliminary index of consumer sentiment for January fell to 72.7, the lowest reading since November.  The number had risen to 74.5 in December and was expected to rise to 75.5 for January, according to Bloomberg News.

Quicker job growth likely will be required to accelerate improved consumer spending, even as Americans are experiencing sticker shock every time they buy gas.  Unfortunately, hiring has been anemic at best, spurring Federal Reserve policymakers to expand their efforts to jump start the economy.  The lack of optimism “reflects a frustration with the lack of labor market progress,” said David Semmens, an economist with Standard Chartered Bank.  “Until employers start hiring aggressively enough to bring down unemployment, improvements in consumer sentiment will be slow.”  According to the Federal Reserve, industrial production rose in December, advanced by gains in business equipment and home electronics.  Factory, mine and utility output also rose 0.8 percent during the same timeframe, the most significant increase in five months.

Other data from the Department of Commerce showed a 6.7 percent increase in retail sales in December of 2010, the largest jump since the same month of 1999.  The big winner in the retail arena was tony Tiffany & Co., which reported that November-December sales rose by an impressive 11 percent.