- The Washington Times - Monday, October 31, 2005

High fuel prices are cutting into purchasing power in a way not seen in 15 years, forcing consumers to trim nonessentials such as eating out while going into debt and lashing out at oil companies.

Spending dropped in September for the second month in a row, down 1.4 percent after adjusting for energy-induced price increases — the first time that has happened since the energy price spike of 1990, the Commerce Department reported yesterday.

Incomes, which got hit by $245 billion of uninsured losses from Hurricane Katrina, fared little better. Disposable incomes — after taxes and inflation — rebounded by 1 percent last month after dropping by 1.5 percent in August, but remained below the high of $8.164 trillion set in July, the department found.

“Families in all of our states have already been hard-hit by prices at the gas pump and now they’ll be looking at as much as a 50 percent jump in heating bills,” said New Mexico Gov. Bill Richardson, a former U.S. Energy Department secretary who, like most political leaders, has been hearing from constituents upset about high fuel costs.

Worries about energy have soared to the top of concerns in public-opinion surveys, with majorities favoring such drastic actions as imposing windfall-profit taxes on oil companies, switching to hybrid cars, and mandating higher fuel efficiency for sport utility vehicles.

Political leaders are in a bidding war to appear tough on oil companies that the public overwhelmingly believes are price gouging. Pump prices have fallen back below $2.50 a gallon from records over $3 last month, and premium crude prices dropped yesterday to below $60 a barrel for the first time since July.

Consumers are changing their energy and spending habits in response to high prices. They are shunning large sport utility vehicles, causing a plunge in U.S. auto sales in the past three months, while trying to curb fuel use when possible. The result has been a rare decline in demand for gasoline in recent weeks.

Retailers that cater to low-income consumers, the group hardest hit by fuel costs, also report lackluster sales, although Wal-Mart reported yesterday that sales appeared to revive some in October with the steady decline in pump prices.

Spending on discretionary items like sports and entertainment have dropped, and restaurant sales have been flat for several months as consumers hunkered down and stayed home.

“Restaurant operators are increasingly concerned about the impact that high gas and energy prices will have on both their operational expenses and customers,” said Hudson Riehle, senior vice president of the National Restaurant Association.

The Federal Reserve, which will meet today to raise interest rates in its campaign to stifle energy-induced inflation, views the setbacks for consumers as temporary, and will not yield in its determination to keep inflation from becoming a problem, analysts said.

A gauge of inflation in yesterday’s report soared by 0.9 percent on higher gas prices last month, although the increase was 0.2 percent when energy and food prices were excluded.

Fed officials want to force consumers to curb spending on non-fuel items and learn to conserve, rather than feed an inflationary spiral sparked by higher gas prices.

“With gasoline at or near $3 a gallon recently, and other energy costs such as natural gas almost doubling in the past year, consumers may face tough choices in how they allocate their spending,” said the Fed’s Atlanta bank president, Jack Guynn.

The response has been mixed, however. While consumers have tried to conserve, they also have strived to maintain their purchasing power by going deeply into debt and dipping into savings, yesterday’s report showed. The personal savings rate has fallen to zero in the past four months as a result.

“Consumers have been able to increase spending more rapidly than their incomes by borrowing against the rapidly rising values of their homes and piling on credit card debt,” said University of Maryland business professor Peter Morici.

“However, retail sales growth has been weak in recent months because consumers are now strapped,” he said.

“The new home, auto, mortgage and consumer credit industries are particularly vulnerable.”

LOAD COMMENTS ()

 

Click to Read More

Click to Hide