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Why the spike in gas prices won't hurt spending

July 19, 2013: 9:59 AM ET

Most economists do not expect gas prices to reach the levels that typically force consumers to stop spending elsewhere.

<> on July 16, 2013 in Los Angeles, California.FORTUNE – For the 12th day in a row, prices at the pump have climbed, hitting a national average of $3.67 a gallon Friday for regular self-serve, according to AAA. Gas is up nearly 20 cents a gallon, or about 6%, during that period.

Whenever drivers see spikes such as these, it makes headlines. Rising gas prices can drag down the economy because they leave less money in the pockets of consumers to spend on other things. It was back in December 2007 when the surge in oil prices helped push the U.S. economy into recession. The housing and banking crisis played a major role, but so did oil shocks; they hurt consumer spending and the auto industry, research has shown.

But as a rule of thumb, economists say consumers generally don't really notice they're paying more at the pump until gas hits the $4 a gallon mark. Unless you live in California, Hawaii, and Alaska, where prices have risen above $4, most drivers aren't feeling the pinch. States like Connecticut, Illinois, Michigan, Washington, Oregon, and the District of Columbia are close, but it's unlikely that consumers across the rest of America will pull back their spending this year because of higher gas prices.

A handful of factors have driven the uptick, but protests and political turmoil in Egypt, a major oil producer, have been the driving force, says Chris Christopher, economist at IHS Global Insight. Egypt's Islamist President Mohammad Morsi was ousted after mass protests that started in late June. The upheaval didn't actually impact U.S. oil supplies, but it did unnerve oil traders; oil futures have risen by 5% since the protests broke out.

MORE: Chevron is making a mistake in Argentina

Assuming things calm down in Egypt, and nothing major erupts in the Middle East, gas prices nationwide aren't expected to reach $4 a gallon; by the end of the year, they're likely to fall back to $3.15 a gallon, Christopher forecasts. Before the recent uptick, oil prices had generally been falling on weaker demand from around the world. China, the world's second-biggest oil consumer, has seen economic growth slow; the eurozone continues its longest-running recession. But because average prices have remained relatively steady, ranging between $3 and $4 per gallon since the end of 2010, economists say their effect on growth has been minimal.

Even so, U.S. consumers spent less than expected in June, when retail sales grew only slightly by 0.4%. If it weren't for auto sales and higher gas prices, retail sales would have fallen 0.1% from a year earlier.

"Consumers are proceeding with caution despite relatively elevated levels of consumer confidence and some traction on the housing front," Christopher says.

If consumer spending falls further in the coming months, gas prices probably won't be the culprit.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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