By John McAuley
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)--A bromide used with increasing frequency lately to pooh
pooh concerns about rising gasoline prices holds that "in real terms, gas prices
are lower than they've been in the past."
According to that theory, it logically follows that if the U.S. economy
survived even higher real gasoline prices in the past, it will do so again in
the face of these smaller gas price hikes.
The most recent version of this logic was contained in Federal Reserve
Chairman Alan Greenspan's statement Friday in a speech before the National
Italian American Foundation in Washington. He said that "today, despite its
recent surge, the average price of crude oil in real terms is still only
three-fifths of the price peak of February 1981."
Greenspan and his colleagues at the Fed have characterized the increase in oil
and gasoline prices, in particular, as "essential a tax on U.S. residents." At
the same time, however, he's suggesting that the effects are not so bad in real
terms.
This is a dangerous argument because it's based on the premise that,
implicitly, "all other things equal," oil and gas prices haven't really
increased very much. The danger is that the adverse economic impacts will be
overlooked and they're already showing up.
All Other Things Have Not Been Equal
Using a price index to deflate economic activities that are expressed in
market prices is an effective method of viewing the activity over time to see
what really happened.
To deflate one price by an index of all other prices is much more dubious. The
result of such an exercise is a relative price, but to view the rise in that
relative price in isolation as a tax essentially says that all the other price
rises are unimportant and don't effect consumer budgets, in particular.
For instance, in the 28 and a half years that Greenspan called attention to
between February 1981 and August 2004, consumer gasoline prices rose 45.3%, or
1.6% at an average annual rate. Over the year to August, however, gasoline
prices shot up by 16.5%, accounting for more than one third of the total
increase. Overall consumer prices rose by 115.2% over the past 28 and a half
years, but only by 2.7% in the past year.
The key point is that the increase in gasoline prices isn't an isolated event,
but rather part of a wider rise in prices. It's wrong to focus only on the
gasoline price rise as if all other prices were constant.
Effects Are Not Instantaneous
What's more, rising gasoline prices have effects on economic activity well
after they reach a temporary peak.
For instance, according to the Energy Information Administration of the
Department of Energy, retail regular gasoline prices rose to a peak level of
$2.064 in the week ended May 24, 2004 from $1.476 in the week ended June 2,
2003. Over the summer, prices drifted down to a low average of $1.846 in the
week ended Sept. 13, but in the four weeks to Oct. 11 gas prices have risen back
to $1.993.
Viewing some of the economic data for September suggests the effects from the
gas price move that ended late last spring and then paused are still surfacing.
Remarkably, there was little evidence of an adverse impact in the retail sales
data, which showed a 1.5% overall sales increase led by a rebound (up 4.2%) in
auto sales following a 0.2% decline in August that mainly reflected the decline
(1.3%) in auto sales.
The up-one-month, down-the-next pattern of auto sales likely reflects the
concerns of would-be buyers about the rise in gas prices. "Consumer sentiment
crumbled under the weight of rising gasoline prices, volatile equity markets,
Iraq, and the election campaign after having been little changed for most of
this year," said Steve Wood, who heads up Insight Economics in Danville, Calif.
The University of Michigan reported Friday that its preliminary reading of
consumer sentiment in early October dropped by 6.7 percentage points to 87.5.
Even more substantive was the news that industrial production only edged up
0.1% in September after falling 0.1% in August. The softness was mostly due to a
0.5% decline in autos and parts. The rest of industrial production recorded an
increase of 0.2%.
The August and September softness in industrial production look like the real
soft patch, to use Greenspan's description of the economy in June. That soft
patch looks suspiciously like a reaction to the earlier rise in gasoline prices,
which now look like resuming.
It understates the fragility of the current economic situation to say gasoline
prices are still below their past peak in real terms. High gasoline prices are
undermining consumer confidence and spending.
(John McAuley, who writes about the economy for Dow Jones Newswires, is a
former Wall Street economist. He holds a Ph.D. in international trade and
macroeconomics and has been teaching economics at Fordham University since
1974.)
-By John McAuley, Dow Jones Newswire, 201-938-4425; john.mcauley@dowjones.com
(END) Dow Jones Newswires