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Rising Gas Prices Dampen Economic Recovery

Higher gas prices are taking a heavy toll on the income of average San Diegans, and could hamper economic growth in the region, already expected to be anemic, a new study from the National University System Institute for Policy Research suggests.

Gas prices are up 25% in the last three months, rising from an average $3.50 per gallon average on December 21 to $4.37 by March 12, according to SanDiegoGasPrices.com. For the typical consumer, spending on gas rose from 4.3% of total income in 2010 to 6.2% by early 2012. This equates to an extra $463 spent per person on auto fuel per year.

“Put another way, the increase of gas price alone is more than the average household in San Diego spends on all their consumption of cereal and bakery products, or the entire average annual budget for public transportation,” say the study’s authors.

While over the long term increased fuel costs are expected to put a damper on demand for gas as consumers shift toward more efficient cars and cut their total travel miles, in the more immediate future gas consumption is expected to dip only slightly, as workers still need to commute to their places of employment and many are unable to simply purchase new cars offering better economy.

Because low and middle income families already spend most, if not all, of their income on routine monthly expenses, the extra money required for fuel is likely to siphon funds from other sectors as consumers are forced to choose between the gas to get to work and other staples such as groceries and clothing. Another option is taking on more household debt in an attempt to maintain current standards of living.

Due to this, the study authors predict that if gas prices hold steady at their current $4.37 average it could shrink the overall local economy’s expected growth rate by 0.3%, or about 17% of the projected 1.8% economic growth, as consumers spend the same amount of money but purchase fewer goods overall. This lower spending, the experts say, “operates much like higher taxes in slowing an incipient recovery. In other words, higher gas prices drain purchasing power from the economy. That means families get hit twice: once by the direct impact on household budgets and a second time when higher prices restrain economic recovery.”

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Higher gas prices are taking a heavy toll on the income of average San Diegans, and could hamper economic growth in the region, already expected to be anemic, a new study from the National University System Institute for Policy Research suggests.

Gas prices are up 25% in the last three months, rising from an average $3.50 per gallon average on December 21 to $4.37 by March 12, according to SanDiegoGasPrices.com. For the typical consumer, spending on gas rose from 4.3% of total income in 2010 to 6.2% by early 2012. This equates to an extra $463 spent per person on auto fuel per year.

“Put another way, the increase of gas price alone is more than the average household in San Diego spends on all their consumption of cereal and bakery products, or the entire average annual budget for public transportation,” say the study’s authors.

While over the long term increased fuel costs are expected to put a damper on demand for gas as consumers shift toward more efficient cars and cut their total travel miles, in the more immediate future gas consumption is expected to dip only slightly, as workers still need to commute to their places of employment and many are unable to simply purchase new cars offering better economy.

Because low and middle income families already spend most, if not all, of their income on routine monthly expenses, the extra money required for fuel is likely to siphon funds from other sectors as consumers are forced to choose between the gas to get to work and other staples such as groceries and clothing. Another option is taking on more household debt in an attempt to maintain current standards of living.

Due to this, the study authors predict that if gas prices hold steady at their current $4.37 average it could shrink the overall local economy’s expected growth rate by 0.3%, or about 17% of the projected 1.8% economic growth, as consumers spend the same amount of money but purchase fewer goods overall. This lower spending, the experts say, “operates much like higher taxes in slowing an incipient recovery. In other words, higher gas prices drain purchasing power from the economy. That means families get hit twice: once by the direct impact on household budgets and a second time when higher prices restrain economic recovery.”

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