Markets & Finance

Oil Lifts Consumer-Product Prices, Too

Due to soaring oil prices, everyday consumer items including plastic bags, shampoo, and diapers cost more

Many American consumers winced when gas prices hit $4 a gallon. But the price of oil has had an impact beyond the pump. Everyday items such as plastic bags, clothing, and even diapers have increased along with the cost of gas. "There are a lot of people who are having a hard time now," says John Simpson, a spokesman for the advocacy group Consumer Watchdog. "And things are going to get a lot tougher when gas hits $5 a gallon."

Already businesses such as Jelly Belly Candy are feeling the pinch. The maker of jelly beans and other candies has managed to absorb the transportation costs that have risen with the price of gas. But Jelly Belly's signature clear plastic bags have become more expensive to produce. "We have had to spend more on those little, clear plastic bags than ever and pass the costs on to our customers," says Bill Kelley, vice-chairman of Jelly Belly. "It is a good thing that candy is a recession-resistant industry."

Plastics are not the only products that have become more expensive. Dow Chemical (DOW) raised the price of its chemical products by as much as 20% in the last two weeks. Asphalt prices have increased by 55% from May 2007 to May 2008, according to Argus Media's most recent Argus Asphalt Report. And, according to Information Resources, a Chicago-based market research firm, the price of cosmetics and personal-care products such as shampoo, lipstick, and deodorant has gone up an average of 2.4% in the same period.

Consumer Activity Chugs Along

Despite the rising cost of gas and the looming threat of inflation, economists such as Charles Schultze, a Brookings Institution fellow, are not convinced people will stop buying gas or petroleum-derived products just because they have become more expensive. Schultze believes that, while Americans may continue to cut back on the purchase of gas and other petroleum products, they will continue to buy the things they need until they can no longer afford to.

"There is no 'magic number' where, all of a sudden, people change their consumption habits," Schultze says. "Gas goes for $8 or $9 a gallon in Germany and they haven't stopped buying it."

The Germans may not have a problem with paying more than twice as much for gas than Americans do. But higher oil prices would raise the prices of many products we use every day.

Oil prices show no sign of going down. But for now, consumers are expected to keep buying gas and petroleum-based products. Severin Borenstein, an economist and the director of the University of California's Energy Institute, believes this continued consumption is a sign the economy will continue to roll along, but at a slow pace. "Higher gas prices will make life more difficult for people on the edge," Borenstein says. "But it is not like Katrina. It is not the end of the world."

Winfield is a reporter for BusinessWeek.

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