Washington, D.C. – Prices at the pump have now soared to $3.51 per gallon for regular gasoline, according to the Energy Information Administration, easily shattering an inflation-adjusted record that has stood since March 1981. As gasoline prices rise quickly, consumers’ spending is further squeezed, driving them deeper into debt.
Yet consumer credit is not as readily available as it used to be; consumers will eventually have to cut spending on other consumption items. When this happens, already weak retail sales growth will further decrease, and the economy will find itself in a deeper rut than it is right now since consumer spending makes up more than two-thirds of the economy.
Over the past 12 months, gasoline prices have risen by 23.3 percent, and they could very well keep on going higher. Oil prices have risen by 80.3 percent—or almost four times as fast as gasoline prices. That is, gasoline prices may still go up substantially higher to catch up with the rise in oil prices.
Not that the recent price increases aren’t already painful enough for consumers. In the fourth quarter of 2007, the last period for which data are available, consumers spent 3.8 percent of their after-tax income on gasoline and fuel, up from 3.1 percent in the fourth quarter of 2006. To put this in perspective, over the course of one year, spending on gasoline, oil, and fuels rose by $91.1 billion. Not a single other large spending category rose by an amount this large. With all of this added pressure, what are consumers doing to relieve the stress? One thing is clear. Driving less is not an option.
READ THE FULL REPORT: http://americanprogress.org/issues/2008/04/record_gas_prices.html