Wednesday, August 28, 2013

Fuel prices and the economy

Another weight around the economy’s neck as we head into the potentially troubled waters of 2014 is the high price of fuel.  Oil and gasoline costs are unusually high given where we are in the economic long wave; traditional cycle theory suggest fuel prices should be considerably lower until the deflationary cycle bottoms out late next year or early 2015. 

The latest spike in retail gasoline prices could be seasonal since the summer driving season doesn’t end until next week.  With gasoline prices on the rise again, however, businesses and consumers will be feeling the pinch if the trend continues beyond Labor Day.  The dual factor of rising interest rates and fuel costs are a potentially devastating one-two punch that has the potential to torpedo the economic recovery assuming the trend continues.

Keep in mind that it was the oil and gasoline price spike in the summer of 2008 that served as the proverbial “straw that broke the camel’s back” during the credit storm.  The economic impact of high fuel costs can never be underestimated when the economy is already weakened by the undercurrents of the long-term deflationary cycle.