Tuesday, April 19, 2011

pricier gas and food pinch consumers


Video - The demolition work's almost 75% done now. The price of a gallon of gas at the adjacent Mobil station has gone up 10 cents a gallon since Friday. Horse and buggy, anyone?

DailyFinance | Americans are paying more for food and gas, a trend that threatens to slow the economy at a crucial time.

So far, the spike in such necessities hasn't stopped businesses from stepping up hiring or slowed factory production, which rose in March for the ninth straight month. Still, higher gas prices have led some economists to lower their forecasts for growth for the January-March quarter.

Consumer prices rose 0.5 percent last month, the Labor Department said Friday. Nearly all of the gains came from pricier gas and food.

When taking out those two volatile categories, core inflation was relatively flat. But at the same time, employees are only seeing small, if any, pay increases.

"People have less money to spend on goods other than food and energy and that is going to cause the expansion to slow," said economist Joel Naroff of Naroff Economic Advisors.

The spike in prices is hitting most Americans just as the economy is gaining momentum. Businesses added more than 200,000 jobs in March and February, the best two-month hiring stretch in four years. And the unemployment rate has fallen to a two-year low of 8.8 percent.

Consumers also have a little more money to spend this year, thanks to a one-year cut in Social Security taxes.

But most of the extra $1,000 to $2,000 per person is filling the gas tank. The national average for a gallon was $3.82 on Friday — nearly $1 more than a year ago. In five states, the average price is exceeding $4 a gallon.

How big the economic impact will be is the critical question. Many analysts expect food prices will come down and oil prices will stabilize by summer. If companies continue to create jobs, consumer spending will rise faster. That would give the economy a boost by fall.

U.S. manufacturers are seeing more business, according to a separate report on Friday from the Federal Reserve. Factory output rose in March, bolstered in part by a jump in auto production.

One concern is automakers are bracing for some disruptions in the supply of parts from Japan, which is recovering from a 9.0-magnitude earthquake and tsunami that caused widespread damage.

Nigel Gault, chief U.S. economist at IHS Global Insight, predicts the economy will grow only 1.8 percent in the January-March period, down from an earlier estimate of above 3 percent. Rising inflation will likely cut consumer spending growth to half its pace in the previous quarter.