Saturday, June 28, 2014

Gasoline Pump Prices May Be Key To Sustainable Economic Growth

For those that drive a car, they are certainly feeling the effects of higher gasoline pump prices versus four or five years ago. As the below chart shows, however, average gasoline pump prices have been on the decline (barely) since the beginning of 2011. This attempted decline, or at least stabilization, is occurring in an environment where the price of a barrel of crude oil is trending higher. The significance of oil price inflation is the fact only one recession was not preceded by, or coincident with a rise in oil prices. We highlighted the significance of oil prices in our post, Signs Are Not Pointing To A Double Dip Recession Yet, in July of 2010.

From The Blog of HORAN Capital Advisors

Since 2008 the pump price that seems to be one that can trip up the equity market is around $4.00 per gallon as is evident in the below chart.

From The Blog of HORAN Capital Advisors

Although pump prices have been volatile since 2011, the per gallon price trend does appear to be moving lower. As politicians on both sides of the aisle so often do, they cannot resist raising taxes. Just about a week ago a bipartisan Senate proposal is recommending raising the federal gasoline tax by 12 cents and indexing it to inflation. With the $4.00 level being a critical one, this proposal seems like one that could tip the scale of the economy towards a recession for sure.

Lastly, higher gas prices do impact retail sales. If one looks carefully at the below chart, as the price of a gallon of gas has neared $4.00 per gallon, retail sales seemed to spike dip lower. With consumers accounting for 70% of GDP or the economy, a higher gas tax does not seem to be a sound policy decision at this point in time in my view.

From The Blog of HORAN Capital Advisors

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