Drop in gas prices provides relief, but will it continue?

Filling up his tank last week at the Gulf Express on Broad Street in Nashua, Ron Pacheco called the recent drop in gas prices a “blessing.” Prices are finally moving in the right direction, he said.

After peaking this summer at more than $4, a gallon of gas has fallen below $2 in some New Hampshire towns. The average in Nashua is about $2.18.

Scott Scheurich, a construction foreman who lives in Merrimack, shares in that relief, now that his monthly gas allowance from work will go a little further. He spends most of his days on the road, driving up to 500 miles per week.

“I’m glad it’s coming back down, that’s for sure,” Scheurich said. But don’t get too excited. Economists don’t expect this dip to be permanent. It’s largely driven by temporary circumstances: the ongoing financial crisis and the threat of a global recession.

“Everyone is expecting oil prices to go up again,” said Karen Conway, professor of economics at the University of New Hampshire. “Certainly, I don’t think gas prices are going to be this low forever.”

And, due to a phenomenon called “sticky prices,” the cost of goods and services that spiked right along with gas prices have not been as quick to fall.

Sticky prices

Sticky prices is a term economists use to explain why when consumer prices go up, they tend to stay up – at least for a while. That holds true even if the factors that drove them up are no longer an issue.

“By and large, most prices are sticky in the economy,” Bethune said. “There’s a period of time before they adjust.”

Sometimes companies are trying to recoup losses they incurred before they passed price increases to their customers.

Other times, they’re waiting to make sure the conditions that allow them to lower prices will persist. Grocery stores and airlines want to make sure gas prices will stay down, for example.

According to Jim Chappelow, an economist for the Institute for Trend Research in Concord, businesses also have to spend money to lower prices. Grocery stores have to change their prices in the computers and on their stickers. Restaurants have to print new menus.

And if oil prices go up again – driving business costs back up – they’ll have to do it all over again.

In this economy, it’s tough to predict what will happen to oil prices – economists expect the price of oil to be extremely volatile in the next few years, with wide fluctuations up and down.

“If I were a food producer, or an airline, I might be concerned right now,” Conway said.

Also influential to sticky prices, according to Chappelow, is the concept of sticky wages. When companies lower prices, they rarely have the option of reducing wages to compensate for lower revenues.

Bethune said there will eventually be some amount of correction in consumer prices. Food prices have already begun to fall, and airline prices will follow at some point, he said.

Changing behavior

Record oil prices undoubtedly prompted a change in consumer behavior. People drove less. They traded in their SUVs for compact and hybrid cars and talked more about alternative energy.

Mike Biederman, of Milford, said his driving habits changed. He started running all of his errands at once.

“I try to make it one trip,” he said. “You don’t go to the store for one small item.”

Christine Colby, of Hollis, said her family skipped out on a few trips. They have family in Connecticut they haven’t seen as often, she said.

It remains to be seen whether consumers will continue to drive less and conserve fuel in this down economy now that gas prices aren’t so painful. Colby said she is concerned that the new, lower prices will make conservation less popular.

“It’s great, but it doesn’t do good for alternative fuels,” Colby said. She had hoped high gas prices would make people more open minded about fuel efficiency and green technologies.

Bill Nasshan, senior vice president of marketing and merchandising for Shaw’s Supermarkets, said grocery store shopping habits changed when gas prices went up and the economy declined. The stores got busier, because people were eating out less often, but higher priced items became less popular.

Now, people are eating fewer steaks in favor of ground beef or pot roast. They are buying pork and chicken with the bone, as opposed to boneless.

“There was a five or six year window where people thought boneless, skinless chicken breasts were how chickens were grown,” Nasshan said. “But now people will buy with the bones in.”

Store brands are also selling better now, Nasshan said. Industry wide, store brands as a percentage of sales have gone from 10 to 25 percent.

“I don’t think we should be fooled by the lower gas prices . . . it’s going to be a long time before people go back to their old ways, if they ever do,” he said.

Nasshan said beef, chicken and pork suppliers are beginning to ease prices, but there hasn’t been much change in dairy prices in the last 60 days – which saw some of the highest spikes due to rising gas prices.

Chappelow said there is pressure on grocery stores right now to bring prices down because the industry is very competitive.

“A consumer can go to the grocery store across the street very quickly. The store that lowers its price first is going to quickly see more business,” he said.