Unhappy New Year to U.S. economy from $100 oil

By Alister Bull - Analysis

WASHINGTON (Reuters) - The U.S. economy needs $100 oil like a hole in the head.

The spike in oil to a fresh record on Wednesday is not single-handedly going to tip the United States into a recession. But on top of a housing slump and lingering credit crisis, it increases the head winds facing the battered U.S. consumer.

It also risks higher inflation, which will worry the Federal Reserve and may limit the U.S. central bank's appetite for steep interest rate cuts in the future. Investors are counting on the Fed to shield the economy from a more severe hit.

"The oil price increases of the last few years have not caused the major dislocations that we observed in earlier oil price shocks, in part because American consumers seem to be largely ignoring the price of gasoline," said James Hamilton, economics professor at the University of California San Diego.

"But consumers also seem to be ignoring the recent softness in incomes, declines in real estate prices, and worries about near-term economic prospects. We may have reached a point where something's going to give," he said.

Economists have long been watching for this breaking point. So far, Americans have kept spending despite a housing slump and a credit crisis that is making banks nervous to lend.

Oil touched $100 a barrel on Wednesday after supply concerns and a weaker U.S. dollar triggered speculative buying, but it retraced part of its run-up before New York markets closed. It settled up $3.64 at $99.62 a barrel.

GRADUAL SQUEEZE