In the latest sign inflation is tapping the brakes on the recovery, gas-price increases have practically wiped out Americans’ winnings from last year’s tax holiday.

So says Goldman Sachs. The firm cut its first-quarter U.S. growth projection Friday for the second time this month, warning that the price of gasoline – up to $3.83 a gallon on average at the latest reading – could undermine consumer spending and slow an already laboring economy.

Wholesale gas prices surge

“A key reason for concern is the sharp rise in gasoline prices so far in 2011 — nearly 70 cents per gallon — which is siphoning off household income at a run rate equivalent to $100 billion per year,” writes economist Andrew Tilton.

That means Americans who thought they would pocket $110 billion this year in aggregate thanks to the payroll tax holiday are now down to $10 billion – which amounts to about $33 for each man, woman and child. It is not easy to feed a consumer spending rebound on that sort of budget.

That said, Goldman continues to expect the U.S.economy to expand smartly for the rest of 2011, thanks to accelerating hiring and modest wage growth.

But it acknoweldges that risks to that forecast are growing, and slashed its first-quarter gross domestic product growth expectation to 1.75%. That’s down from 2.5% two weeks ago and 3.5% as recently as last month.

“A reacceleration in spending growth is possible, but will require a fortuitous combination of circumstances—a modest further pickup in the labor market, gasoline price relief, and a benign asset price environment that encourages consumers to gradually reduce saving,” writes Tilton.

For now, that combination is exactly what Goldman is betting on. The firm said not once, not twice but three times last week that it expects commodity prices to come down in coming months, which could ease the pressure on gas prices. They are up 31% at wholesale this year (see chart, right).

At the same time, Goldman has been urging clients to wait for the commodity correction, all the better to buy back into commodity futures at lower prices, on the assumption tight supply and steadily rising demand (especially in the developing world) will keep prices marching higher in the long run.

So the U.S. economy may indeed climb the wall of worry in 2011 if gas prices fall back and the labor market recovery gains steam. But don’t think for a second that $4 gasoline, and its complications, is just a passing fancy. We will be fretting over that problem for years to come.

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