$5 Gasoline Would be One Ingredient of a Toxic Brew

03-02-2011 • CNBC.com

"It is a rough rule of thumb, but the U.S. economy has run into trouble when there is a combination of interest rates (the cost of money, which everyone uses) and energy prices (the cost of energy, which everyone uses) that turns restrictive," Rissmiller wrote in a note today. He said he goes by a rule of 10 — a level at which the economy is vulnerable. To get to that number, he adds the mortgage rate to the price of gasoline and when the sum exceeds 10, he says the economy has seen downside risk. In order for the hazard from high energy prices to kick in, the energy price move needs to be sustained. The shock from higher oil prices can have some near term impacts but it also works with a lag of about a year. For instance, he points out that the personal saving rate typically declines as consumers respond to gasoline price spikes. Rissmiller says if there is a sustained energy price shock — enough to cause an economic slowdown in 2012 — another round of Fed easing could be in the cards.