Monday, April 4, 2005

A Crash Course in Trickle Down Economics

Oil prices spread to grapes, TVs, pizza
By Alexandra Marks and Robert Tuttle

from the March 29, 2005 edition -
Read the entire article at:

NEW YORK - Christie Baker, owner of Flowers on the Green, recently had to hike the cost of a delivery in Guilford, Conn., from $6 to $8 to make up for the higher cost of gas. In La Jolla, Calif., Domino's just increased the amount it pays delivery drivers by a nickel a trip: They now get 95 cents to transport a large pepperoni, but it's still not enough to cover the cost, says assistant manager Donald Cunningham. And at Meyers Moving & Storage in New York City, they're now charging $15 more an hour to move from an apartment on the East Side to the West. Owner Guy Drori says the rates may go up again come summer.

The hike in oil prices is beginning to ripple through the economy, pinching consumers at places far beyond the gas pump.

During the past year, the robust economy absorbed much of the increase in energy costs. Competition for consumers helped, and kept many businesses from passing along the spike in fuel costs. But with gas prices hovering around new record highs, and the cost of diesel keeping pace, many businesses are finding they can no longer absorb the increased costs. That was reflected last Tuesday in the Producer Price Index, which rose 0.4 percent in February.

And though prices have eased in recent days, they remain well above $50 a barrel, and many expect them to stay high. So air travelers on international routes are now seeing huge fuel surcharges, the cost of a bunch of grapes is up a few cents, and economists expect to see costs increase on an array of manufactured goods from televisions to toasters.

"The true cost of energy is now being felt more broadly through the entire economy," says Mark Routt, a senior consultant at Energy Security Analysis, Inc., in Wakefield, Mass.

The reason, according to Mr. Routt, is what he calls the "tale of two economies." Most consumers focus on gas prices and the impact on their wallets. But diesel, which fuels truckers and some manufacturers, has gone up just as fast, and in some cases, gone higher. Thanks to that competition for consumers, combined with the concurrent growth of cheap imports, most people have so far been sheltered from that impact.

"I can still go online and I can order a TV set or a pair of pliers or some other gadget and still get free shipping, if I'm careful," says Mr. Routt. "That, however, can't last forever."

Listen to the independent truckers, who've taken a major hit from the diesel-price hikes. The base prices charged by truckers were set when the price of gas was just $1.10 per gallon during the 1990s, according to Larry Daniel, president of America's Independent Truckers' Association. So truckers have been watching their incomes shrink. A decade ago, truckers spent roughly 17 cents per mile on fuel; today they pay 35 cents. While there is a surcharge that truckers can pass along to the shipper, Mr. Daniel said that often the charge is pocketed by a broker or not charged at all.

Eventually, he says, truckers are going to have to start passing those increases along.


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