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Just how expensive is oil these days? Think Scud missile expensive. George (minus the "W") Bush bombing expensive. Burning wells and pitch-black smoke polluting the atmosphere expensive.
Indeed, for the first time since the Persian Gulf War, the price of a barrel of crude climbed above $30 this week. The same barrel went for just under $10 in December 1998. While I hate to keep harping on it, the steady move higher continues to put pressure on mortgage rates and suggests inflation will be more of a problem than market watchers expected even a few months ago.
Why? Many economic forecasters will tell you that overall inflation, as measured by the Producer Price Index and Consumer Price Index, doesn't really matter. They say people should focus on the so-called "core PPI" and "core CPI" because those two indexes don't include changes in food and oil prices, which can bounce around from month to month.
That makes sense if you're talking about short-term gyrations. But what's going on in the oil market today -- no matter what people whistling past the graveyard tell you -- is anything but a one-month aberration.
For starters, it used to cost me about $19 to fill up the tank in my 1995 Jeep Wrangler when the gauge was near empty. Now, the weekly bill comes to about $26 at the cheapest Mobil station around. If prices stay where they are now, I'll end up spending $1,170 through the end of the year for gas rather than the $855 I'd have spent under the old price structure.
Having to come up with $315 more a year for fuel makes my financial life a little more stressful. Yet there are millions of other consumers who are even worse off. In New England, where the price of heating oil recently soared above $2 a gallon, people are struggling to pay heating bills. Some are keeping their thermostats even lower than the 59.5 degrees I did in college to save money while others are forgoing warmth altogether.
Because of its consistency, the increase in oil prices may reverberate through the economy in other ways, too. Employers will almost certainly start feeling pressure to give larger-than-normal raises to compensate for the higher cost of living. And with unemployment at 4 percent and plenty of jobs out there, many will have to cave in to wage demands if they expect their employees to stay put.
Some will have to raise prices to pay those higher wages, and those price hikes will come on top of ones already instituted by oil-dependent companies. In recent weeks, for example, airlines and package-delivery firms added fuel surcharges to their base rates.
As a result of this chain reaction, both core and overall price figures likely will get uglier as the year progresses. That means even more pain in mortgage land. Indeed, with mortgage rates at their highest level in about five years, people should seriously think about whether they can afford to buy a home before they take the plunge.
Those who already own may want to consider cutting back on spending and paying down debt, too. The Federal Reserve Board has already hiked rates four times in less than a year, and will likely do so again March 21 when its policy-setting committee next meets. More increases could follow in May and June. Because each increase drives rates on HELOCs and variable-rate credit cards higher, it's going to get tougher to make debt payments in 2000 without some belt-tightening now.
Be careful.
The National Index is based on a Wednesday survey of the 50 largest banks and the 50 largest thrifts in the 10 largest metropolitan areas in the country. These are averages. To find specific rates offered by lenders, go to our mortgage rate search engine.
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