The federal government’s latest plan to spark some life into the U.S. economy appears to be running out of gas already.
Congress hoped to encourage consumer spending, which makes up 70% of the U.S. economy, by introducing a Social Security payroll tax cut at the end of last year. The impact seemed significant. A household with an annual income of $60,000 would see an extra $2,400 in 2011.
But what lawmakers may not have been expecting was the rising cost of both filling up gas tanks and filling up fridges around America.
The payroll tax cut plan is supposed to stimulate the economy by putting $122 billion dollars in the bank accounts of 155 million people.
The hope was that some Americans would spend that money and not save it or use it to pay down debt. The only problem is, it looks like many of us will end up using it just to keep fuel in our cars and food on the table this year.
Gas prices have taken a dramatic jump around the country in recent weeks.
The average price for a gallon of regular unleaded gas in February was $3.17. As of Friday March 3rd, the national average for gasoline had risen to $3.47 per gallon.
The price of oil is about 24% higher than it was a year ago.
Many analysts say the positive effects of those sweeping tax cuts are being neutralized by the fact that inflation is hitting consumers hard.
“The way things are going at the moment, all the payroll tax cut will do is offset the rise in gasoline and food prices, rather than provide a boost to real spending.” economist Paul Dales of Capital Economics told Fortune.com.
Experts also say that Americans have yet to truly experience the pain of prices at the grocery store. The cost of corn, wheat and soybeans having been rising for months. Food inflation is expected to really pick up in the second half of 2011 as higher prices make there way up the supply chain.
Plus – you need to realize that when the cost of basic commodities goes up – so does just about everything.
Take corn for example. The price of corn doesn’t only affect corn on the cob and those microwavable bags of frozen veggies. It impacts everything with corn in it – which is a lot of stuff my friend!
Higher corn prices mean you pay more to go out for breakfast. They mean it costs farmers more to feed their cattle, which can mean higher dairy prices. Corn is used in ethanol – so higher corn prices can mean even higher gas prices.
On top of food and oil, another commodity that’s been on the rise is cotton. Prices hit a 140-year high last month. That has meant clothes cost more too!
If you think we can absorb little price changes here and there – think again. Consider this: the average driver spent about $200 on gas in February of 2009. Last month $347 was the average spent on gas.
Let’s just say you spend an extra $147 on gas each month for the entire year. That would mean more than an additional $1700 is going towards gas, which is a pretty big chunk of that $2,400 a typical household would see from the payroll tax cut.
We set the U.S. record for highest national average for gas prices in July 0f 2008. At $4.11 per gallon – the amount of money spent on gassing up equaled 10% of the median American income. Many experts say we can expect a new record in 2011.
When people have to pay more for the bare necessities – it can only have a negative impact on the economy. Putting gas in you car isn’t an option, neither is feeding your family. When Americans spend more money on things like that – they have no choice but to cut spending elsewhere.
Get some help budgeting for the basics by reading our article Get a Grocery Shopping Strategy. Watch the video below for a few basic tips to get you started.
Image Credit: hugoslv, tome213 and Joey Yen
+Kasey Steinbrinck writes regularly on personal finances and the U.S. economy for Check Advantage. Visit them today and view their most popular checks including a big collection of Classic Checks. Contact Kasey to request free content for your website or blog.
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I agree…Its like having a credit card that’s maxed out and instead of paying it off, you ask for an increase in credit. Fundamentally you did not change anything. But in the surface it seems that you’re OK. But who are we kidding?
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