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Sep 29, 2016

Prominent Economist Says Oil Price Surge Not Recessionary

Published: Apr 27, 2011

By Michael S. Derby

NEW YORK (Dow Jones)--The rapid rise of gasoline prices thus far isn't likely to send the U.S. economy back into recession, according to a prominent economist who attributed at least some of the last contraction to surging fuel prices.

"I think (rising gas prices) will defiantly take a toll on GDP growth for 2011," said James Hamilton, an economics professor with the University of California, San Diego, in an interview. "I think it may not be more than a 1% drag or so based on what's happened so far," and the impact should be blunted because "the dynamics of a recovery are still in place."

Hamilton gained considerable prominence in recent years for his research into the causes of the 2007-2009 recession. While there were many reasons for that downturn, not least the implosion of the housing sector and financial markets, the worst of the recession was also attended by a huge surge in gasoline prices. In widely read research, Hamilton said there was a good chance the contraction wouldn't have happened if fuel prices hadn't soared.

The average price of gasoline is yet again testing the highs seen in during 2008. According to data from the Department of Energy, the average price per gallon has jumped $1 since a year ago, and stood at $3.88 in the week ended April 25. It peaked at just over $4 in 2008.

Making sense of the effect of gasoline prices on the economy is tricky business. That's because for economists and policymakers, rising pump prices can cause a mix of higher inflation and increased economic headwinds. The debate centers on which of those two forces dominates.

A gasoline price surge can push up overall measures of inflation for obvious reasons, although it's less clear what happens to the underlying rates of inflation most closely watched by Federal Reserve policy makers. In that sense, it's possible central bankers would need to respond with tighter monetary policy.

But gasoline prices eat away at households' spending power because driving expenses are hard to cut back on for most Americans. Every extra dollar paid at the gas station is a dollar that can't be spent on other things, and thus a bite is taken from overall economic activity. In that scenario, policymakers might want to run an easier policy stance to counteract the negative influence.

Fed officials, who meet this week to deliberate on what's next for policy, disagree over what oil prices mean for the economy, although key officials like Chairman Ben Bernanke seem to lean toward the view that higher oil prices weigh more on growth, to the extent the public's expectations of future inflation hold relatively steady. Indeed, in recent comments the Fed leader has suggested oil price gains, along with surging costs for food and other commodities, are likely temporary, and he's pointed to the relative stability of the public's longer run inflation view to buttress his view the economy isn't set for an inflation break out.

Hamilton said he counts himself in alliance with those who tend to view higher energy prices primarily as a problem for growth. While he noted the diminished expectations for first-quarter gross domestic data due Thursday, he believes the overall health of the economy has improved in a way it can take the higher prices, and he noted the auto industry can likely navigate the hit better than the last time out.

While Hamilton said there isn't a magic mark that once breached recession will follow, "If we go to $5 (a gallon), call me again. I would be quite worried."

(Michael S. Derby, a special writer with Dow Jones Newswires, has covered the Federal Reserve since 2001. He also writes about bond markets and the economy, and can be reached at 212-416-2214 or via email:

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