Fuel prices have reached record highs, and other commodities are approaching, if not reaching, similar milestones. In the words of one of my former students, “What does it all mean?” Simply put, for consumers it means changing spending habits.
Let's look at the impact of the rise in the cots of gasoline. At current prices, people have to spend about $13 more per week, per vehicle on gasoline alone. That comes to slightly more than $56 per month, on average. And if you've got two vehicles, your monthly gasoline expense goes up by about $112.
How do consumers react in this situation? There are two things most people do right away. The first is to cut down on the number of miles they drive. Since September 1, in fact, people have cut back by about 2%.
The second is to change to less expensive brands or cut back on purchases of some items altogether. In either case, people look in their wallets and make the kind of purchasing adjustments that will enable them to get through the week. This can be very difficult for the 20% of American households that are flat-out spending everything they earn each week.
Unfortunately, inflation-related price increases, such as the rise in fuel costs we're seeing now, do not impact everyone equally. Those in the low wage earner group and those on fixed incomes are at a particular disadvantage, since they have to make changes in buying behavior for a much bigger percentage of their disposable income than does the rest of the population.
Rising fuel costs affect more than the gasoline and diesel we need for our vehicles. Heating bills for this winter, for example, are expected to increase about $40 a week every time temperatures fall to below-average levels for the six-month period starting in November.
When I left my house in Maine in late September, I had to decide whether to buy oil now for next season or wait until next year. After filling up my truck at $3.10 per gallon, however, the decision was an easy one — wait till next year.
But the people who live in Maine year-round do not have that option. The two-vehicle households that maintain driving and heating habits similar to last year will need an extra $66 a week to cover those expenses.
I doubt that many of them will hold onto their old habits, but they still won't have as much money to spend on other kinds of goods this winter and into next spring.
Average wage increases of 3.5% will mean an extra $17 per week in gross pay, and less than $12 a week in take-home pay. Needless to say, that's not enough to cover the additional $66 a week people will need to run their cars and heat their homes.
Public institutions are also affected by these price increases. For example, some states have asked law enforcement officials to cut back on the amount of miles they put on state vehicles. In addition, many school districts will run through their fuel allowance well before the school year is over. In fact, some districts are moving to four-day weeks to save money on heat, electricity and transportation.
This is the time of year when planning for 2006 budgets is under way. We can be sure that there will be a request for higher taxes to meet the increased costs that many of our public institutions are facing.
As a result, it is very quickly evident how painful inflation can become to those least able to adjust. In the coming months, we will see flatter growth for consumption and a need to redistribute funds to those more needy at this difficult time. Yet, the underlying economy will be strong enough to post 3% growth, on average, through June of next year.