The magic price of $4.25

Date posted: April 6, 2012

Everyone is focused on rising gas prices. Concerns are now being raised that the higher fuel costs might end the good news we’ve recently received about the economy. Should we be worried? N.C. State University economist Mike Walden responds.

“Well, we should be. … Every cent that gas prices rises takes away a billion dollars in consumer spending on other goods and services. And most of that billion dollars is going to flow outside the country. So, that’s a big economic impact.

“Also we see a tie-in between gas prices and consumer sentiment.  That is, gas prices go up, consumers feel more glummy. They feel upset. Consumer sentiment goes down, and that’s important because consumer sentiment is a fact behind buying big ticket items like houses and cars, et cetera.

So, clearly higher gas prices are a drag on the economy. Now one question that’s being asked is, At what level would gas prices have to get to such that that drag on the economy also could be strong enough to pull the economy down potentially into another recession? And economists right now are saying $4.25 seems to be a magic level. If we get gas prices to $4.25 and they stay there — or indeed if they even go higher — then I think the worries about the sustainability of the economic recovery we’re in will actually get heightened.

“Now there’s been one helpful factor, … and that is, if other energy prices — like (that of) natural gas — have actually been going down, but this obviously has less impact as the summer approaches.

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1 Comment to The magic price of $4.25

  1. by Jack P.

    On April 8, 2012 at 9:16 pm

    Greetings from the UK Dr. Walden.

    I just filled up my tank here at a price of… GBP1.38 a liter. Do the math and that’s a U.S. equivalent price of $8.30 a gallon. Certainly the distances people drive here are on average smaller than the U.S. and there is a lot of frustration at gas prices. One of the lessons I think we learn here is that as gas prices rise, people choose cars more carefully, they buy smaller cars that can go 60 or more miles per gallon. If people are right about peak oil, these prices will be coming to the U.S. within a few years, so frugal cars will probably become a necessity for a lot of people.

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