Gas fuels inflation - little relief in sight

Crude may have come down in the last couple of weeks, but your budget won't get any fatter just yet.

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By Steve Hargreaves, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Prices soared in July on the back of record oil. Now, after witnessing the sharp drop in the cost of crude, Americans are hoping for relief in August. They may be sorely disappointed.

The latest consumer inflation report on Thursday said that prices in July rose at an annual rate of 5.6%, with energy costs increasing nearly 30%.

Looking at just gasoline, the burden consumers are facing is even more alarming. Gasoline prices averaged $4.06 a gallon in July, up from $2.96 last year, a increase of 46%, according to the U.S. Energy Information Administration.

"Fuel prices have been going crazy," said Lester Lave, an energy economist at Carnegie Mellon. "The person on the street is going to see that and say 'I'm having a hard time making ends meet.' "

As bad as gasoline prices seem, it's a good thing they didn't follow the price of crude oil in lockstep. Crude averaged $133 a barrel in July, up from $74 a barrel last year, according to EIA. That's a staggering rise of nearly 80%.

Refiners - unable to pass along all of the rising cost of crude to a public cutting back on driving - absorbed much of the difference between the rise in oil compared to gas prices. They took a big hit on profits in the process.

Since July oil has pulled back substantially. It is now trading around $114 a barrel, down 20% from highs of more than $147 in mid-July. Analysts say we could see $100 a barrel in the coming months.

That means the overall price for energy could be significantly less in next month's inflation report. Lave said we could even see a negative overall inflation number from July to August.

But the portion of our paychecks going toward energy is likely to continue rising in the coming months. Just as the price of gasoline didn't rise as much as the price of oil did, it is also not likely to fall as much as oil.

Gas, currently selling for $3.78 a gallon average nationwide, is down about 8% from a high of $4.11 a gallon hit in July.

Prices at the pump will likely fall further. But refiners, already operating on a razor-thin profit margin, will do everything they can to keep them from falling as much as oil prices.

That means the amount of money people spend from their daily budget on gasoline is likely to remain relatively high.

Standard & Poor's predicts people will spend 7% of their disposable income on energy in the third quarter of 2008, up from 6.5% in the second quarter.

For comparison, people spent just 4% on their disposable income on energy in 1998, said Beth Ann Bovino, a senior economist at S&P.

Consumers won't see the percentage of the income they spend on energy decline until 2009, said Bovino.

And even then, energy prices will still hurt.

"They stabilize and then come down a bit, but they're still pretty high," she said. "And the way oil prices swing back and forth, it's a moving target."  To top of page

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