Worry Gas Prices Could Go Higher?

What is there to remember about 2004? The final episode of “Friends.” The Boston Red Sox won the World Series. George Bush beat John Kerry. Ken Jennings was defeated. A destructive tsunamic swept the Indian Ocean. And gas prices rose 31 cents a gallon in April over what they were in December.

Starting in 2004 and for the next two years, the Federal Reserve raised interest rates 17 times. They did it to curb inflation and to calm down an economy where prices were rising too fast. Interest rates went from 1% to 5.25% and commercial banks raised their rates to 8.25%, thus increasing the cost of credit cards, car loans and mortgages. It slowed down business expansion, the stock market and the exuberance that was inflating prices.

The Fed did it, under George Bush, to calm inflation.

Now that regular gas is selling for $3.54 a gallon in Bucks County, you may have a sense of inflation again. Gas prices are up 40% over a year ago. That’s a shocking increase.

Think the answer is staying home? Grocery store prices went up 3.5% last year and will go up 2.5 to 3.5% again this year, more if you are a meat eater. Beef and veal prices are predicted to increase between 6.5 and 7.5 percent in 2021, pork prices are predicted to increase between 6.5 and 7.5. Think eggs are a cheap protein substitute? The people in Asia are fond of American eggs, which has put pressure on the domestic egg market. Prices are expected to go up at least 3%.

Overall consumer prices are up 4.4%. That is due to increased demand, to container ships backed up at ports, to the shortages in electronics and critical computer chips caused by supply chains shut down due to Covid, and now to people rewarding themselves by traveling, moving, restarting their lives and joining the workforce. It has jazzed the economy in unexpected ways, and thus the Federal Reserve has announced that it is considering a rate hike.

Scott Horsley said on NPR, “Raising rates would not unpack those container ships, it would not make more computer chips for autos. But it would put the brakes on job growth.”

That the Fed is considering a rate hike is often enough to throw cold water on things. Actually, the Fed doesn’t set your bank’s interest rate. It sets what is called the effective fund rate, the exchange rate at which the big Commercial Banks buy and sell funds overnight, or the Secured Overnight Financing Rate. The Fed’s actions also set the Prime Rate, currently 3.5, which is what mortgage companies use to set their mortgage offerings. Online savings accounts will react quickly to any change the Fed makes, while most brick-and-mortar banks are paying 0.06% interest on savings.That is one of the problems of having an interest rate that looks like a flat line on an EKG.

Federal Fund Interest Rate - Bucks County Beacon - Worry Gas Prices Could Go Higher?

If interest rates do go up, some people will blame Biden, as they are now blaming him for higher gas prices. They may have forgotten that in the four years under Trump interest rates went from .065 to 2.4.

Trump Interest rate hikes. - Bucks County Beacon - Worry Gas Prices Could Go Higher?

Some codgers are old enough to remember the 1970s, when interest rates were 17%. Not 17% on a credit card for someone with bad credit. That was 17% if you wanted to get a car loan. Princeton economist Alan Blinder said recently on NPR: “I think the generation that were adults in that high-inflation period will always remember it. But there are a lot of Americans that never lived with inflation at all. So naturally, they don’t expect it.”

On top of inflation in the 1970s there was an energy crisis, and people had to wait in line to buy gasoline, if gas stations had any gas to sell. The price was an outrageous 86 cents a gallon.

That is $3.25 in today’s money.

Some people attribute lingering resentment over gas prices and shortages to ending Nixon’s popularity, and thus his Presidency, over the Watergate kerfuffle.

Presidents will do anything to defeat inflation, because as Fed Chairman Jerome Powell says, “Inflation eats into people’s pocketbooks.”

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Picture of Linda Lee

Linda Lee

A former editor and reporter at The New York Times, Linda Lee has written seven books, and started a magazine about real estate and design in Miami. While her interest lies in Bucks County, her family lives near Harrisburg. She has a Shih Tzu named Yolo.

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