The Real Problem With Higher Gas Prices

My fellow Fool Morgan Housel penned a great article earlier this month, "That Crazy, Lying, Deceptive Consumer Price Index." In short, he explained the weighting that the CPI puts on housing costs and how that has helped dampen the impact of soaring food and energy prices on inflation numbers. He also made a good case for why the hefty housing weighting makes perfect sense.

And I agree. Sort of.

There's no arguing that housing is the largest line item on most families' budgets and that a run-up in the cost of housing would wreak a lot more havoc on the collective consumer budget than the rising price of coffee beans (though, to be fair, this makes up a pretty big part of my grocery budget). But unfortunately, facts and reality don't always matter in the soft sciences of economics and politics.

When it comes to consumers deciding whether to open up the spending spigots or tighten the purse strings, I have a feeling it's very rarely done through a sober examining of the ol' budget spreadsheet and much more often the result of psychology. And with the media clawing through the 24-hour news cycle, desperate for readers and viewers, the delicate psychology of the U.S. consumer doesn't stand a chance against gripping headlines telling them that they're being savagely beaten down by these rising prices. Here are just a few gems I was able to find (no digging necessary):

  • "More pain at the pump‎"
  • "Rising gas, food prices take toll‎"
  • "Obama's High Food Price Policy Stealing Milk from Babies"
  • "On inflation, don't believe your eyes‎"
  • "Gas prices fuel consumer's frustration‎"
  • "Consumers keep eye on rising gas prices‎"

Of course it'll probably get even worse. As Morgan rightly pointed out last month, many companies have been absorbing the higher prices and haven't been passing them on to consumers. We've seen this from a wide range of companies, from Procter & Gamble (NYSE: PG  ) to Nike (NYSE: NKE  ) and Pepsi (NYSE: PEP  ) . Just wait to see what the headlines look like when these companies (and plenty of others) start pushing through price hikes.

In the end, consumers may not actually be subject to a huge amount of inflation right now, but as long as they feel they're being throttled by rising prices, reality may not matter. And given how dependent our economy is on consumer spending -- and therefore the consumer psyche -- that's less than ideal.

Nike is a Motley Fool Stock Advisor pick. PepsiCo and Procter & Gamble are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 30, 2011, at 5:24 PM, xetn wrote:

    I believe that the Fed's policy of creating massive amounts of new money out of thin air is the major cause of the current wave of price inflation. Since the crisis of 2008, the Fed has created some $2 trillion of new money.

    I believe this article goes a long way in explaining the problem:

    http://mises.org/daily/5155/Where-Is-QE2-Taking-Us

  • Report this Comment On March 30, 2011, at 5:28 PM, xetn wrote:

    Oh, by the way, what do you think will be the impact on oil prices with Obama's latest idea of reducing oil imports? Hmmm, lets see, greater supplies, lower prices. Smaller supplies, higher prices. Pure genius!

    He wants to reduce supplies, but fails to think about the result.

  • Report this Comment On March 30, 2011, at 8:59 PM, Tygered wrote:

    I found the best thing to do is never watch the news and never listen or watch commercials. That way the stupid headlines never beat me down. It definitely has helped my stomach and I don't find that I'm missing anything that is important. That's just my take.

  • Report this Comment On March 31, 2011, at 12:01 AM, ershler wrote:

    extn,

    Last thing I heard Obama was pushing Brazilian imports, now he is wants to restrict all oil imports. One day he didn't want Gaddafi to leave Libya and the next he committed the US to major combat operations until Islamic extremists are in charge. That guy apparently can't make his mind up.

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