Gas prices will likely rise above $4 a gallon this summer in the U.S., but there’s no guarantee it is going to tank the U.S. economy, according to Deutsche Bank’s Carl Riccadonna.
Riccadonna admits that prices are rising ahead of long-time averages, and that right now, future demand driven price increases that come during the summer confirm we’re heading to $4 a gallon.
But what really matters is how long we stay there, according to Riccadonna.
Earlier this year we estimated that the “tipping point” for gasoline prices was probably somewhere near $4 per gallon based on a range of factors including household income growth as well as analysis of past episodes when energy price spikes impaired economic activity. It is worth clarifying an important point in this regard—prices need to be sustained at the threshold for an extended period (quarterly average), not merely touch it briefly. Of course, it is possible that the threshold is higher than we initially projected; particularly if the pace of hiring (and hence income growth) accelerates more noticeably.
Riccadonna says the situation in consumer confidence and retail sales suggest the economy may be able to handle $4 gas.
But a quick look at the trend shows we are way out ahead of price growth already for the year.
Photo: Deutsche Bank