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Higher Gas Prices Could Test Economy

The price at the pump is reapproaching the highs seen last spring, but the spike may reverse as the market recovers from Isaac, says Lord Abbett's Milton Ezrati.

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Milton Ezrati of Lord AbbettGasoline prices have risen almost back to the highs seen last spring, although there’s been remarkably little coverage. Such a move will affect the economy, whether or not it’s noted in the headlines, especially if the higher prices stick. The experience last spring offers a model of what to expect. If the spike is short-lived, as it was then, the economy will show brief signs but quickly correct. If prices remain elevated for a period of months or rise farther, the pace of real economic growth, already anemic, will suffer. In time, the impact on general price levels could constrain the Federal Reserve’s ability to consider further monetary ease.

The immediate picture is far from pretty. In the past few weeks alone, the national average retail price for a gallon of gasoline has risen almost 11%, from a low of $3.36 in late June to about $3.75. That is only 5.5% below the $3.94 high last April. In higher-tax states, such as Connecticut and California, the price per gallon has already topped $4, as it did last spring. Since the increase in retail prices so far has failed to keep up with the 20% rise in wholesale gasoline prices and the 27% jump in crude oil, chances are the price at the pump will move up still more in coming weeks.

Against this less-than-encouraging backdrop, there is reason to expect only short-term pain. Certainly the immediate pressures on gasoline prices would seem to be transitory. The storm in the Gulf of Mexico, Isaac, has disrupted production, but the effect will not likely last long. Damage from a fire at a San Francisco refinery that created a shortage on the West Coast will be repaired relatively soon. A pipeline rupture in Wisconsin that interrupted supplies flowing into the large Chicago market is already being rectified. In another temporary factor, refineries generally have slowed production as they anticipate cooler weather and retool from the distillation of gasoline to the distillation of heating oil.

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