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What Do Higher Gas Prices Mean for the Economy?

·3 min read

The good old days of $3-per-gallon gasoline seem to be in the rearview mirror. Fuel costs have soared in the last year, and the full impact is bound to affect your life and your finances for the foreseeable future. But what do higher gas prices mean for the economy?

According to AAA, the average gasoline price in the U.S. was around $4.25 per gallon as of July 29. In California, it topped $5.63 per gallon. Nationwide, the year-ago per-gallon average was around $3.17.

This is alarming, and not only because we’ll all have to cough up more money to fill up the tank. Already, high gas prices are taking a toll on the U.S. economy, and the situation could get worse if fuel costs remain high.

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What Causes High Gas Prices?

Gas prices are high now largely because of Russia’s invasion of Ukraine. In the wake of the invasion, the U.S. took steps to eliminate its dependence on Russian fuel sources. The U.S. has also offered to help European nations shore up their fossil-fuel stockpiles, meaning that the U.S. will export much of its own petroleum reserves.

On top of that, American petroleum drillers had already cut back on production and instead focused on increasing dividend payments to the shareholders. We can also add a shortage of qualified workers into the mix.

What Are the Effects of High Gas Prices?

There’s a multitude of knock-on effects when fuel costs soar. For one thing, the price of practically every product that’s transported by automobile or airplane will go up.

Second, people will take fewer trips, which is negative for the travel and hospitality industries. They’ll also consume fewer discretionary/luxury products because they’re more expensive, and because they’re spending more of their income on gasoline.

For businesses, skyrocketing transportation and freight costs have a profound impact. Companies have to cut back in other areas, such as research and development. Furthermore, they often end up passing on the increased costs to the consumers, which is bad for business.

In addition, high petroleum prices are a major contributor to U.S. inflation. As long as gas priced remain elevated, the inflation rate will likely stay unusually high and that could get financial-market investors nervous. If your investments are particularly sensitive to inflationary shocks, it might be time to consider reallocating to more inflation-resistant assets, such as precious metals.

What You Can Do about High Gas Prices Now

The bottom line is that we should all find ways to conserve fuel whenever possible. The supply side of the fuel-price equation is out of the consumer’s hands, but the demand side can be contained by driving less.

As an investor, keep track of your holdings. Check for companies in sectors that are hurt the most by higher gasoline prices. It’s not a bad idea to lighten up on discretionary-product businesses, as well as travel and hospitality companies, until fuel costs come back down somewhat — which, to be honest, might not happen this year.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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