Tuesday, February 28, 2012

Goldman Explains Why We Have No Idea What Really Happens When Gas Hits $4/Gallon

Joe Weisenthal

You hear a lot about the magic $4/gallon level for gasoline, and how consumers bug out at that level, but there's actually very little data to go on, as Goldman's Alec Phillips explains in a new note:

The idea that consumers might respond to a psychologically important price level seems intuitive enough, but it is difficult to test the importance of the effect of the $4.00/gallon threshold since it has only been crossed once, for six weeks in June and July 2008 (on a national basis it has not been crossed since, though it came close in May 2011 and some areas did see prices over $4.00/gallon). A dummy variable signifying whether the gasoline price is above $4.00 is statistically insignificant and inconclusive. This is not surprising in light of the fact that there was only one brief sustained period in which prices were above this level and that it directly preceded the most acute phase of the financial crisis. Still, we believe the $4.00 threshold was important in light of anecdotal evidence and other survey measures that indicated large changes in reported behavior based on gasoline prices.
On the other hand, the fact that we've been at this level before might be mitigating...
 

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