Fed Stimulus: Raising gas prices and hurting the middle class

Posted: February 27, 2012 in Economics
Tags: , , , , , ,

From the blog, Seeking Alpha, a great post that demonstrates how Federal Reserve policy may be acting against the best interest of the country’s economy. Everything from the regular Joe fleeing stocks, inflation on the rise (despite what the Fed Chair Ben Bernanke tells us), and rising gas prices. All due to the Federal reserve’s actions. You can read the entire post, here. Below is a taste.

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The Fed has kept interest rates pinned to the floor at 0% for the last several years. A primary stated objective of this strategy is to stimulate economic growth. But in many ways, it is providing added headwinds for the economy to overcome.

Gasoline prices have followed a predictable trend since the first days of Fed stimulus. During QE1, gasoline prices skyrocketed by +118%. Once QE1 ended in April 2010, gasoline prices immediately dropped by -27% in a matter of months, and this occurred during what is typically the strong summer driving season. Once QE2 was delivered to the market in August 2010, gasoline prices jumped another 92% by the end of this stimulus program in June 2011. Once again, the moment QE2 ended, gasoline prices retreated another -28% in a matter of months. Finally, since the latest Fed stimulus program along with the European Central Bank’s own LTRO program, we’ve seen gasoline prices skyrocket another +30%. What is even more irksome is that much of this rise in gasoline prices has occurred during a time when gasoline consumption has been falling. Have the laws of supply and demand been repealed? No, they’ve just been severely distorted by policy action.

Rising gasoline prices represent a huge drag on economic growth for the following reasons. Based on 2010 data from the BLS, spending on gasoline represents roughly 3.6% of total household expenditures. But it is a measurably more 5.4% for middle-income households and 10.8% for low-income households. Looking back at readings from 2008 when gasoline prices were last at these levels, gasoline expenditures represented 4.3%, 6.5% and 12.1%, respectively. As a result, it’s not much of a leap to consider that these percentages are likely to return to these previous 2008 highs as gasoline prices continue to skyrocket well ahead of income growth. These are meaningful implied tax increases resulting directly from monetary policy to say the least.

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