It appears that American investors have finally woken up to the fact that the climbing price of oil, which has now reached over $US123 a barrel, is bad news for the economy, for retail and for consumers. So much so, that Wall Street had its worst day for a month yesterday, dropping 206 points, or 1.5% on the Dow.

World oil price futures hit a new intraday record of $US123.87 a barrel in Asian after-hours trading on the New York mercantile exchange. That was 7 US cents above the previous record of $US123.80 hit in trading in New York time.

You could have knocked me down with a subprime mortgage: after the continuing poor news about the economy, housing, employment and watching oil and most commodity prices firm, US investors have suddenly realised that the upturn, if it comes, will be messy, uneven, and not very convincing.

The US dollar is still weak and there’s a slow realisation that inflation is making a return to the centre of the economic debate as the credit crunch turmoil eases and the battered US economy staggers on.

It’s only early days, but that forecast from Goldman Sachs of oil prices climbing to $US150-$US200 a barrel in the next two years has started concentrating minds.

As did news that US consumers slapped far more on their credit cards in March as they ran out of money. According to figures from the Federal Reserve, US consumers put $US15.3 billion of new purchases on their cards in March, more than double what had been forecast by the market, and a potent sign that millions of Americans don’t have enough spare cash to make day to day purchases.

Wages have fallen in real terms, outstripped by consumer inflation at 4% annual, or 3.2% (excluding oil and food). Producer prices for industry are running at more than double the consumer headline figure.

US productivity improved in the March quarter, according to other figures, but that was because of 240,000 or so jobs lost and working hours being cut: the economy still expanded so existing workers and machines did more with less.

Now oil prices show no sign of slowing: they’ve risen by around $US9 a barrel in the past week: supply worries are helping push them higher, but stocks are tight, even though US consumption is falling because of the slowdown and high petrol prices.

Which made Federal Reserve Bank of Kansas City President Thomas Hoenig to say overnight that “there is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it.”

He warned that US consumers are gaining an “inflation psychology to an extent that I have not seen since the 1970s and early 1980s”.

Hoenig said that the current economic weakness can be largely attributed to slumping housing construction and higher energy prices, which reduced consumer and business spending and “financial market disruptions, while noteworthy, are not the major story behind the recent weakness, energy price increases and housing dominate this slowdown.”