Payroll Tax-Cut May Be Offset by Rising Gas Prices

The latest inflation data shows rising gasoline prices could start pinching consumers and steal away any savings from the just-approved extension of the payroll tax cut.


For now, the higher costs could be somewhat offset by lower winter heating bills. Those heating bill savings will fade however, as spring driving season begins. And by then, experts say gasoline could be over $4 a gallon.

The Consumer Price Index rose 0.2 percent Friday, but underlying the tame number was a 0.9 percent gain in gasoline prices.

Gasoline prices at the pump hit a national average of $3.52 per gallon this week. That is up 15 cents from a month ago and already 40 cents above last year’s level, according to AAA.

Congress voted Friday to extend the payroll tax cut—which was due to expire this month—through December. Pierpoint Securities chief economist Stephen Stanley said that will put about an extra $1000 or more in the hands of the average family.

“Typically, what they do is they take the money and pocket it," Stanley said. "They pay down debt. In 2011, you had two things that were mirror images of each other. On the positive side, you had the tax holiday and on the negative side, you had rising gas prices which were the inverse of that.”

Stanley said the same could happen this year if gasoline prices keep rising.

Gasoline prices are closely watched since they can rise quickly and have a very rapid chilling effect on consumers.

“So far the increase in gasoline we’ve see in terms of the percentage move is very similar to what we’ve seen in prior Januarys," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "I’ll start to get worried once we’re above $4 a gallon, and if it happens in the next four to six weeks, I think what’s going to happen is you’re going to see prices start to correct owing to normal seasonal behavior.”

He added: “Our rule of thumb is it’s one penny of gas is equal to $1 billion in household energy consumption.”

Tom Kloza, analyst and founder of Opisnet, said he expects gasoline to reach an average somewhere between $3.75 and $4.25 when it peaks, in late April or May.

“We’re starting to see the $4 number pop up regularly on the west coast,” Kloza said.

Kloza said, unlike any other time, the differences in gasoline prices across the nation is being influenced by an unusual diversity in oil prices.

He said in the upper Midwest, Minnesota for instance, a refinery using Canadian oil can purchase crude at $50-60 a barrel less than east coast refiners, which tend to use West African oil.

For that reason and because of refinery shutdowns on the east coast, the gasoline in the northeast could be among the highest priced this year.

Gasoline prices will ultimately depend on where oil prices go, and whether the situation in Iran pressures crude further. For that reason, some analysts are predicting prices of $5 or more at the pump.

“We’re already at Arab spring numbers,” Kloza said. But he does not expect gasoline to reach $5 nationally.

The northeast, and other areas, have benefited this winter from lower fuel costs, due to warm weather.

“In terms of demand, the winter was a bust,” said John Kilduff of Again Capital. “We’re 20 percent behind in terms of heating degree days” in New York.

LaVorgna said consumer spending on natural gas and electricity was down 4.6 percent in December, but any savings will be fleeting.

“I think the gasoline affect is always more important than the home heating effect,” said LaVorgna.

He said drivers who need to drive to work have a harder time changing habits than homeowners who can adjust the level they heat their homes, and also may have budgeted for heating costs.

LaVorgna said rising gasoline prices also ultimately act as their own lever. Since the beginning of this year, gasoline demand is down about 7 percent, continuing a trend that's been in place.

"Every time gasoline gets to $4, it goes down pretty hard," said LaVorgna.

Gasoline is half of the average consumer’s energy bill.

Follow Patti Domm on Twitter: @pattidomm

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