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$5 Gasoline Would be One Ingredient of a Toxic Brew

Consider this pairing: $5 gasoline and 5 percent mortgage rates.

That could be the start of a toxic brew for consumers, according to Don Rissmiller, chief economist at Strategas.

He says the economy could probably handle a 5 or even 6 percent mortgage rate, or $5 a gallon gasoline, but not both.

"It is a rough rule of thumb, but the U.S. economy has run into trouble when there is a combination of interest rates (the cost of money, which everyone uses) and energy prices (the cost of energy, which everyone uses) that turns restrictive," Rissmiller wrote in a note today.

He said he goes by a rule of 10 — a level at which the economy is vulnerable. To get to that number, he adds the mortgage rate to the price of gasoline and when the sum exceeds 10, he says the economy has seen downside risk. In order for the hazard from high energy prices to kick in, the energy price move needs to be sustained.

The shock from higher oil prices can have some near term impacts but it also works with a lag of about a year. For instance, he points out that the personal saving rate typically declines as consumers respond to gasoline price spikes.

Rissmiller says if there is a sustained energy price shock — enough to cause an economic slowdown in 2012 — another round of Fed easing could be in the cards.

Economists vary on what price point gasoline would become an issue for the consumer. Some say it starts to change behavior when gasoline edges to $4 or higher, and, like Rissmiller, they say the rise will have a negative economic impact only if it is sustained.

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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