Since January 1, 2012, there is a considerable hike by 45 cents in the gas price. The price reached its pinnacle at this time of year, an average of $3.73 a gallon. The economist are analyzing whether the hike in gas price can derail the economic recovery.
But the economists evaluated that the economy is in a better state than earlier last year. In 2010, a similar hike in the fuel price paralyzed the economic growth, as it squeezed the household budget. The Americans restrained themselves from spending on clothes, food and so on. The consumers who controlled their spending pattern managed to stay debt free.
The effect of gas price hike is not severe on the economy that seems to improve. The effect of rising gas price is more evident on the economy that is slowing down.
The economists opine, if there is a record increase of $4.11 a gallon in the gas price, still then the economy can withstand the increase. The reasons behind this evaluation are as follows:
1. The job market is improving in the US, so millions of people who are employed can spend their paychecks. Therefore, it can help in the growth of the economy.
2. Job security helps the Americans to manage the rise in the gas price.
3. The fluctuation in the housing market seems to diminish and it helps in the development of the economy. When the economy is stable, it helps to boost the confidence of the consumers. These consumers can confidently spend on other things despite the rise in gas price.
Last year it wasn’t only gas that was getting expensive. But the prices of other products like milk, meat, bread also increased with the rise in the price of grains and other farm goods. The price of natural gas also increased last year and made things more difficult for the Americans.
But this year, there is a considerable drop in the natural gas price and the major issue related with the rise in the gas price. Last year, when the economy squeezed the consumers, they managed to grapple with the situation by making tough choices like cutting out expensive dinners and so on.
The rise in the price of gas is gradual this year, which can make it easier to sink in the mind of the American consumers. Last year, by mid May prices suddenly rose from $2.78 to $3.98 that was difficult for the American consumers to manage.
According to the analysis of a senior economist Carl Riccadonna at Deutsche Bank, a 25-cent increase in gas affected the consumer spending by $25 billion to $30 billion. It led to lower the economic growth by 0.2 percentage points.
Riccadonna states that if the gas prices rise above $4, it’ll only divert $60 billion from consumer spending this year.
Some economists anticipate, oil and gas prices are already nearing a danger zone. If there is an alarming increase in the gas price in case it exceeds $4.11, then the situation may further complicate.
Each household expense in the US may increase by $1,000 more this year than last to buy the same amount of gas. It may have psychological impact on Americans. In this situation, the consumers may recollect the great economic depression that ruined the US economy. The situation can be similar to the alarming increase in the gas price, before the financial crisis shook markets in 2008.
Therefore, it is evident that high gas prices are a danger sign and can lead to a complicated financial situation. As a result a debt relief plan is required to be designed for the consumers, if the economy takes a serious shape in the US.