Food and Energy Costs Reduce the Effects of Tax Cuts

According to an article in the Washington Post, the rising food and energy prices are corroding the effects of the tax cuts. The extra money workers received this past January from the reduction in the payroll tax has halted momentum in consumer spending.

The Obama administration had anticipated that a variety of tax cuts would bolster the country’s prospects of economic recovery, but positive data is yet to be seen. One of the core parts of the tax cuts was to cut two percent from the amount that workers were required to pay into Social Security for the year. The idea was simply that if consumers had more discretionary income, they would feed it into the economy.

In sum, the tax cut gave $66.3 billion to workers boosting incomes roughly 1 percent. However, most of the income has been invested in more expensive meals and toward fuel. These areas of consumer spending account for 20 percent of total consumer spending according to the Commerce Department.

Adjusting for inflation, with energy prices spiking in January by 2.3 percent in response to the unrest in the Middle East as well as food costs rising .07 percent, consumer spending has actually declined by 0.1 percent according to the Washington Times.

Mark Vitner, an economist from Wells Fargo indicates that the factors of high energy and food prices are the twin culprits holding down the effects of the tax breaks. The news is not all gloomy however. There are alternate causes for the spikes in oil prices apart from the Middle East unrest, and one of the most prominent factors figuring into this equation is the recovering global economy. Because the economy is improving, global demand for goods is increasing across the board. As a result, more companies are producing goods and require the capacity to ship greater volumes. This trend is pushing oil prices higher as well.

Sources:

http://www.google.com/hostednews/ap/article/ALeqM5g4YAkdMilxuxHpcH45N7qZdjAedg?docId=0999a98f78604338a6eeaf14a8d26a1f

http://www.washingtonpost.com/wp-dyn/content/article/2011/02/28/AR2011022804487.html?hpid=moreheadlines

http://www.bloomberg.com/news/2011-02-28/u-s-january-personal-income-and-spending-text-.html