Searing Oil Price Singes U.S. Economy, Analysts Warn

By Agence France-Presse Searing oil prices, stoked by Middle East terror and fierce global demand, are curbing U.S. economic activity but not by enough to derail the recovery, analysts said. If they persist, however, high energy prices threaten to take a sizeable bite out of the economy just as the impact of super-low interest rates and hefty tax cuts begins to fade. So far, high oil prices have failed to kick-start an inflationary wage-price spiral as they did in the 1970s and 1980s, said Wells Fargo Bank chief economist Sung Won Sohn. Also, people have been cushioned by tax cuts and near rock-bottom interest rates, which set off a frenzy of mortgage re-financing, lowering monthly payments and unlocking cash from home equity. Typically, economists expect a $10 a barrel rise in the price of oil to shave half a percentage point from the annual economic growth rate, while adding the same amount to the inflation rate. The longer the oil price stays high, the deeper the impact, said Merrill Lynch chief North American economist David Rosenberg. U.S. Federal Reserve policymakers, meanwhile, are widely expected to start slowly raising the key federal funds target rate from a 1958 low of 1% at their next meeting on June 30. If energy prices remained at current levels for the rest of the year, Rosenberg expected them to shave half a percentage point off 2004 growth, which he tipped at just under 4.5%. Copyright Agence France-Presse, 2004