Monday, December 06, 2010

Inflation in the Form of Higher Energy Costs

I just drove from southern Arizona to northern Utah. I noticed a range of prices from as low as $2.65 per gallon regular to $3.09 per gallon. With the price of a barrel of crude in the $90 range, $3/gal is imminent. The liberal states on the east and west coasts are already there.

When the cost of energy goes up, the average person begin to question his/her spending. Most of us are conscience of our thermostat settings -- some can handle it a bit warmer or cooler than others. To each's own. When it comes to driving, we all need to get to work, run errands, shuttle family members, etc. Gasoline is somewhat price inelastic. We might cut back some but most of our driving patterns remain the same regardless of the price.

The real impact comes within the broader transportation industry -- trucking, railroads, shipping and airlines. As their costs increase, they pass them onto the consumers. With higher transportation costs, we spend more of our limited incomes on higher energy prices, not on more consumer goods.

High unemployment with be with us for years. Low housing prices are here for years. Higher energy prices will increase annually. Salaries will continue to remain flat for years. Inflation is upon us despite what the Fed says. It is obvious they never go to the grocery store or consider the price of gas when they fill up their SUV tanks.

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