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The rising impact of high oil prices

Americans now spend a larger share of their income on energy than at any time since 1986.

By Ron SchererStaff writer of The Christian Science Monitor / April 18, 2008

A sign outside a service station displays the prices of gasoline in San Francisco.

Jeff Chiu/AP

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New York

Americans cannot avoid the soaring price of oil.

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They pay for it at the pump, with gasoline at a record $3.42 a gallon. They get hit by fuel surcharges when they book airline flights. Higher fuel prices are a major reason for rocketing food prices – in part, because corn is being diverted from the food supply to make ethanol, in part because of higher fuel costs to produce and transport food.

Now, rising energy prices – oil hit records above $115 a barrel this week – are causing concern about the potential damage to the economy. Americans are spending a larger share of their income on energy than at any time since 1986. That has crimped pocketbooks and helped dampen consumer sentiment. Purchases of everything from cars to clothing are falling.

"We are all worth less and earning less than a year ago," says economist Mark Zandi of Moody's Economy.com. "That is why consumers are pulling back, and judging from the confidence numbers they are in a panic mode."

Many energy analysts believe the bad news is just beginning – the price of gasoline is expected to continue rising through Memorial Day.

Since the beginning of April, the price of gasoline has risen by 13 cents per gallon, according to AAA, a drivers' organization in Heathrow, Fla. AAA is predicting gasoline prices on a national basis will hit $3.50 a gallon by Memorial Day. "It's well within the range of possibilities, but we think $4 a gallon is still premature," says Geoff Sundstrom, a spokesman.

One indicator of the effect of the steady rise in oil prices came on Wednesday when the Labor Department reported that the March consumer price index, a measure of the rate of inflation, rose by 0.3 percent – or close to a 4 percent annual rate after no change in February. Energy prices alone rose 1.9 percent in March, with gasoline climbing 1.3 percent.

If it were not for a large drop in clothing prices – due to retailers trying to unload inventory – the overall inflation rise would have been much higher. If you didn't eat and didn't drive, the inflation rate was only 0.2 percent, barely within the Federal Reserve's comfort level.

In the past three months, average consumer spending on energy came to $663 billion, or 6.5 percent of total consumer spending, according to Moody's Economy.com. A year ago, it represented 5.8 percent and in 2002, it was 4.1 percent of their spending. "If gasoline breaks through $4 a gallon by Memorial Day, that would mean spending on gasoline would have risen by $100 billion since the beginning of the year, or roughly the size of the tax rebate checks going out," says Mr. Zandi. "The rebate checks are going to pay for filling up our tank."

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