Gas prices have more than doubled from their recession low and are cutting into consumers' disposable income as they trend closer to their historic peak. The lower energy intensity of production of the US economy means that higher gas prices are not as damaging as they were in the 1970s and 1980s. Nor have automobile sales been impacted in the near term. Nonetheless, a temporary increase in inflation and strains on household budget allocations will negatively impact consumers just as confidence is gaining traction.

Temporary fluctuations in gas prices will limit consumers' ability to budget effectively, but a sustained increase will result in reallocations that have implications for real estate reaching beyond the retail sector. By way of example, transit hubs become more highly valued as transportation costs rise and the marginal consumer substitutes from private to public modes of travel. In markets where the utilization of public transit is already very high – such as Manhattan – the impact will be muted.

In 2010, spending on gasoline accounted for approximately 4.2 percent of the average household budget. Gas prices are now roughly one-third higher. If there was no offsetting adjustment in household gas consumption, related spending would increase by more than $700 a year, cutting into cash that might support more robust discretionary spending on items such as clothing and entertainment. That is apart from the impact of higher fuel costs on home heating and other expenditures. Household budgets take time to adjust, so the impact may not show up immediately.

Will gas prices remain elevated, or even rise higher? The outlook is dependent on a range of geopolitical factors as well as specific supply decisions made by the oil exporting economies. US monetary policy also makes a difference. Since global oil prices are denominated in US dollars, a weak dollar means higher oil and gas prices for domestic consumers, ceteris paribus. Investors who believe monetary policy will remain accommodative (i.e. that the Fed will hold to low interest rates) should not expect relief on this front.