Oil prices and the US economy

Peter Coy in Business Week's 10/20/07 issue writes on Oil & Housing: A Volatile Combination. He notes that the current slump in housing accompanying the subprime credit issues combines with rising oil prices to slow US economic growth. And he writes:

It's hard to shrug off costly oil when it's only a few bucks below its 1981 all-time high, in inflation-adjusted terms. Back in 2004, when oil was a little over $40 a barrel, economists at Standard & Poor's estimated that every $10 increase in the cost of a barrel of oil subtracted about a quarter of a percentage point from the economy's growth rate. Trouble is, the higher prices get, the more harmful each $10 increment becomes, according to Beth Ann Bovino, an S&P economist. If prices stay in the mid-$80s per barrel through 2008, Bovino estimates, oil and housing combined could squeeze growth in the Presidential election year to as low as 1.5%, vs. 3.8% in this year's second quarter.

Worse yet, pricey oil doesn't just suppress growth; it also raises inflation. On Oct. 17 the Labor Dept. announced that consumer prices rose 0.3% in September on the back of higher energy and food prices. The worst-case scenario is a return of 1970s-style stagflation. (my emphasis)

Tags: oil, us economy