Rising fuel prices and news of massive job losses buffeted an already shaken U.S. economy in the past week. The record energy prices are affecting the cost of everything from baked goods to diapers. Journalists John Authers and Roben Farzad discuss how the prices got that high and whether it appears they will stay that way.
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As Judy reported, the economy crossed its latest painful threshold this weekend: the average cost for a gallon of gasoline is now officially at $4.
But the record energy prices are also affecting the cost of everything from baked goods to baby diapers. How did they get that high? And will they stay that way?
For that, we turn to two writers who have been following the volatile markets. John Authers is the investment editor at the Financial Times, and Roben Farzad is a senior writer at BusinessWeek magazine.
Roben, we've talked Friday on this program about the perfect storm that's been brewing out there of bad economic news. In a nutshell, what's the cause?
ROBEN FARZAD, editor, BusinessWeek: It's really twofold. A lot of people are going to study Friday going forward. I mean, that was such a shock to the system to see oil go up $11 a barrel.
You did have some global, you know, histrionics on the margin, i.e., what's going on in Nigeria, with the ongoing uprising in the Niger Delta and Iran saber-rattling.
But it was really an unbelievably obtuse story in that we got terrible economic news in the morning, something which would typically cause crude oil prices to go tumbling down. People suddenly fearing further weakening in the dollar went to crude oil as a readout of safety. That's increasingly being looked at as a hedge against inflation, thus exacerbating the recessionary news in the first place.
And it remains to be seen if that kind of perverse relationship is going to unwind.
John Authers, it's very difficult for a layperson to try to figure out what the fallout is or where the fallout isn't with this kind of bad news. Take a stab at it.
JOHN AUTHERS, Financial Times:
Well, the most significant fallout we've had today is that we've got policymakers, Tim Geithner at the Federal Reserve most plainly today, making it clear that oil now is at the kinds of levels where it will require action to deal with that. And that action could, indeed, be painful.
And one of — the big drama that we've seen today in the markets is, I think, primarily a consequence of what's going on in oil, which is that we've seen a very sharp sell-off in bonds and a huge increase in the market's expectations for what the Fed is going to do to interest rates.
So even though the economy is going slower, obviously, the message from a very surprisingly bad employment report back on Friday, people now think that the Fed is actually prepared to raise rates to defend the dollar. And, at the moment, the link between oil and the dollar is remarkably close. Something that's bad for the dollar will push up the oil price.