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Price spike: Higher fuel prices test US economy

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Drivers of long-haul delivery trucks, such as this one pictured January 2018, are contending with surging US gas prices
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Surging energy costs are being felt across the US economy with varying effects. Some consumers are absorbing higher costs, while others are shifting behavior or cutting back.

Here’s a sampling of how the story is playing out in different sectors.

– Trucker sees austerity –

As he contends with surging fuel prices, truck driver Lamar Buckwalter sees signs all around that consumers are cutting back. 

Demand for refrigerated pet food — a torrid business just three months ago — has virtually disappeared. Humans are also shifting their own diets, ordering less high-end meats like veal and crab cakes.

“People are starting to cut off the extras,” said Buckwalter, a third-generation trucker who lives in Pennsylvania. “They’re not buying filet mignon steak.”

The last time he fueled up, Buckwalter spent $5.79 a gallon for diesel, more than double the price from a year ago, a shift exacerbated by lower job rates as demand for trucking services cools.

Mitigating things a bit is Buckwalter’s membership in a national small trucker association that offers discounted fuel. He can also pass on a fraction of the fuel price spike to consumers.

But the pain from fueling up is “enough to make a preacher man curse,” said Buckwalter, who has been turning down trips that pay insufficiently.

He is also planning to tighten the belt on perks for his three employees, such as a summer family picnic. 

“We’ll still do Christmas bonuses,” he said. “Unfortunately, I have to cut back where I can.”

– Tough times for taxis –

Also taking a hit is Rutz Alliance, a New York taxi driver who feels the pinch daily.

“I used to put $25 of gas every day,” Alliance told AFP. “Now it’s up to $45.”

That computes to weekly pay of about $600 to $650, one-third less than the pre-pandemic amount.

“We’re trying to live. We have no choice. Inflation is all over. Rent, food, everything, but it’s take it or leave it.”

Dubbing the jump in prices an “emergency,” the New York Taxi Workers Alliance called in March for a 75-cent temporary fuel surcharge. But city officials have not taken action thus far.

– Airlines pass on the pain –

Airlines have been among the sectors most directly affected by spiking energy prices, with jet fuel prices jumping almost 50 percent since mid-March, according to Argus.

That would normally amount to a huge drag on the industry, given that fuel and labor are two major sources of costs.

“The rule of thumb in this industry is that you can pass through two-thirds of a fuel price increase within three to six months, the full amount within six to 12 months,” said Savanthi Syth, an industry expert at Raymond James. 

But in a twist of fortunes in a pandemic-dominated era, airlines are benefitting from “pent-up demand” of consumers desiring travel after more than two years of being hemmed in.

Airline tickets are currently up 38 percent compared with the level of the year prior, with industry executives saying they are having no trouble passing on the hit from higher fuel costs.

– A higher bar on vacations –

For Chayzz Devyant, one casualty of spiking gasoline prices has been a summer visit to Atlantic City.

Just traveling back and forth to the casino town would cost some $162 in gas, on top of lodging costs.

“Big Oil is to blame,” said Devyant, who hopes to work from home to save on fuel costs. 

But travel experts still expect a busy summer even if more consumers like Devyant cut some trips.

“We are seeing mixed messages. Oil prices obviously have an effect,” said Aaron Szyf, economist for the US Travel Association.

“But pent up demand is so high that hotels/attractions/national parks/flights are all expected to be at full capacity this summer.”

– Electric vehicles get a closer look –

Higher gasoline prices have prompted greater interest from consumers in electric vehicles (EV). Since January, website visits to EV options have soared 73 percent, according to Cox Automotive.

However, the share of visits to EVs remains a relatively small 5.7 percent of overall page views, according to Cox.

Moreover, the shortage of semiconductors and other key supplies has left car dealerships with limited inventories, crimping sales. 

In May, Toyota and Lexus sold 46,000 hybrid vehicles, down 17 percent from the year-ago period amid tight supplies.

At Tesla, the top-selling EV maker in the United States, the wait time is at least three months for delivery of a Model 3 and six for the Model Y.

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Resurging US inflation puts Fed on track for more big rate hikes

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US President Joe Biden (R, pictured May 2022) has given his full backing to Federal Reserve Chair Jerome Powell's efforts to cool inflation by raising borrowing costs
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Red-hot US inflation is showing few signs of cooling, putting the Federal Reserve on track to continue its aggressive interest rate increases to help cool high prices that are challenging Joe Biden’s presidency.

The hoped-for signs of relief for American families did not materialize in May as consumer prices hit a new four-decade high, rising 8.6 percent and topping what economists thought was the peak in March.

With Russia’s war on Ukraine continuing to pressure global fuel and food prices, and amid ongoing supply chain uncertainties due to Covid-19 lockdowns in Asia, analysts now say the expected easing of inflationary pressures will take much longer to materialize.

The US central bank already had signaled plans for more big increases in the benchmark borrowing rate this week and next month, but chances are rising that the Fed might have to be even more aggressive — which increases the risk the economy might tip into a recession.

The latest inflation report — the last major data point before the Fed’s policy meeting Tuesday and Wednesday — also douses hopes central bankers will be able to call a ceasefire in September ahead of key congressional elections, where Biden’s Democrats are widely expected to suffer damaging losses.

Prices continued to rise last month for a range of goods, including housing, groceries, airline fares and used and new vehicles, setting new records in multiple categories, according to the Labor Department data.

Energy has soared 34.6 percent over the past year, the fastest since September 2005, while food jumped 10.1 percent, and the cost of fuel oil more than doubled, jumping 106.7 percent, the largest increase in the history of CPI, which dates to 1935.

The CPI surge “raises the probability of even more aggressive Fed rate hikes to tamp down on inflationary expectations,” said Mickey Levy of Berenberg Capital Markets

If the policy-setting Federal Open Market Committee decides on a giant step — three quarters of a point rather than the expected half-point increase — it would be the first 75 basis point rate hike since November 1994.

Diane Swonk of Grant Thornton indicated such a move is possible. 

“They are behind the curve and eager to catch up,” she said on Twitter. “Fed has to reduce demand to meet a supply-constrained world. Ugly in many ways.”

Economists at Barclays are now calling for a 0.75-point increase, though Ryan Sweet at Moody’s says chances are low, and Karl Haeling at LBBW expects three more half-point hikes.

– Political considerations? –

Biden is facing growing political backlash as high prices increase the pain for American families, who are seeing daily records at the gas pump and higher grocery bills due to the fallout from Russian leader Vladimir Putin’s invasion of Ukraine.

Unlike his predecessor Donald Trump, who relentlessly attacked the Fed and its chair Jerome Powell, Biden has publicly endorsed the central bank’s efforts.

Biden, who blames “Putin’s Price Hike” for the acceleration in inflation, said Washington “must do more — and quickly — to get prices down here in the United States.” 

Hoping to avoid a devastating setback in November elections that could return control of the legislature to opposition Republicans, Biden has urged Congress to approve legislation to bring down costs of key products such as medicines and services such as shipping to soften the blow for US consumers.

Some analysts had speculated that Powell might call for a timeout in the interest rate moves at the FOMC’s September meeting, but economist Levy echoed the prevailing view that a pause in rate hikes is now “looking increasingly unlikely.”

Powell has always insisted that central bankers eschew political considerations and focus on what’s best for the economy.

The Fed, which has already acknowledged that slowing demand will entail some pain, is hoping to cool price pressures without choking off economic growth — but that is looking increasingly difficult.

Gita Gopinath, the number two at the International Monetary Fund, last week said US central bankers are treading an “incredibly narrow path” to achieve a soft landing and avoid a sharp increase in unemployment.

“It will be a real challenge to bring down inflation… without turbulence,” she said at a Financial Times conference, adding that it could “require much steeper increases in rates.”

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US gas price hits a record $5 a gallon: auto group

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US President Joe Biden speaks about the economy and inflation from the deck of the USS Iowa at the Port of Los Angeles on June 10, 2022; record gas prices pose a major challenge with midterm elections only months away
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The average price of premium gasoline at the pump has surpassed $5 a gallon for the first time in the United States, the American Automobile Association (AAA) reported Saturday. 

That record level, coming on top of months of soaring inflation, represents the latest bad news for President Joe Biden just five months before crucial midterm elections.

A year ago, the average price of gas in the US was just $3.07; since then it has shot up by 62 percent. 

While Europeans have long been accustomed to paying much more at the pump, US gas taxes are lower — leaving car-loving Americans in shock over surging prices.  

The increase in gas prices follows a steady rise in oil prices — which had plummeted in the early days of the Covid-19 pandemic as demand sagged, but have risen again as world economic activity resumes.

Oil prices soared further after Moscow invaded Ukraine in late February, and as international sanctions against Russia — a major petroleum producer — began to bite. 

A barrel of crude currently sells for more than $120 in both London and New York.

Overall US energy prices in May were nearly 35 percent higher compared to the same month in 2021, according to government data.

This has contributed to the overall rise in US consumer prices, which were up 8.6 percent in May from a year earlier — a 40-year record.

As the summer vacation season nears, Americans — with their longtime love affair for big gas-guzzling vehicles — can expect to see energy prices rise still further. 

That will pile even more pressure on consumers already struggling with higher prices for food (up 10.1 percent in May), housing, automobiles and health care.

All this complicates Biden’s position. For months he has sought to reassure Americans that his administration is doing everything in its power to bring down prices without derailing the economic recovery.

But in November, Americans vote to elect all members of the House of Representatives and one-third of senators — and polls show voters listing the economy, inflation and high gas prices as their top issues.

On Friday, the president again lashed out at the American oil industry, cautioning it in a statement “not (to) use the challenge created by the war in Ukraine as a reason to make things worse for families with excessive profit taking or price hikes.”

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WTO negotiators finalise key texts on fishing, Covid jabs

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Global fisheries subsidies are estimated at between $14 billion and $54 billion a year, according to the WTO
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Long-sought WTO agreements on fisheries subsidies and a Covid vaccine patent waiver moved a step closer to completion Saturday after negotiators finalised texts for ministerial review, but significant obstacles remained in hammering out a final deal.

Diplomats have been in round-the-clock talks to hammer out texts on several thorny topics before the World Trade Organization’s first high-level meeting in five years, where trade ministers and officials from 164 countries have four days starting Sunday to try and get the negotiations across the finish line.

It takes place against the backdrop of the Ukraine-Russia war and fears of a global food crisis as a result of the conflict.

The global trade body announced in the early hours Saturday that a draft text on a long elusive deal banning subsidies favouring overfishing had been handed over to the ministers.

They will be tasked with ironing out the final sticking points towards a deal decades in the making.

The success of WTO’s 12th ministerial conference will largely hinge on whether they succeed.

“Not every issue has been resolved. Indeed, this is a draft agreement and in this draft there remain some issues that members have not agreed to yet,” acknowledged Colombian ambassador Santiago Wills, who chairs the WTO fisheries subsidies negotiations.

But he said months of intense negotiations had made it possible to present “a clean solution” to some issues that had long “appeared intractable”.

The WTO takes decisions by consensus, making agreements all the harder to reach.

Global fisheries subsidies are estimated at between $14 billion and $54 billion a year, according to the body.

It is widely agreed that action is needed to protect a crucial resource that millions of people depend on for their livelihoods.

WTO members have for the past 20 years been discussing the need for a deal banning subsidies that contribute to illegal and unregulated fishing, as well as to overfishing.

– ‘Significant progress’ –

Wills noted “significant progress” on the tricky issue of “territoriality”, with the draft text ensuring that a WTO panel of experts would not be called upon to decide who has jurisdiction over disputed or overlapping territorial claims.

Progress had also been made on the issue of fuel subsidies, and on the so-called special and differential treatment (SDT) for developing countries, long a key stumbling block, he said, hailing a “considerable narrowing of differences”.

Special treatment for the poorest countries is widely accepted but demands from some self-identified developing countries for exemption from subsidy constraints, including large fishing nations like India, have been difficult to swallow for some.

The draft text proposes that exemptions should not apply to member states accounting for a certain share of the global volume of marine capture production but that percentage has yet to be defined.

Wills stressed the urgency of finally reaching a deal.

“The longer we wait, the more the fish lose. And the more the fish lose, the more we all lose,” he said.

The WTO also said a draft text had been finalised on the thorny issue of a temporary patent waiver for Covid vaccines to provide equitable access to the jabs and better battle the still raging pandemic.

But agreement is far from certain.

The pharmaceutical industry and a number of its host countries have warned of the impact on innovation, while public interest groups warned Saturday that the new text was so weak it might even complicate access to vaccine production further.

“It has been a very difficult process, very difficult,” acknowledged WTO chief Ngozi Okonjo-Iweala.

“I know that for all of you it has been a tough time but we have done the best we can for now.”

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