Rising petroleum prices could significantly erode disposable income and potentially derail the strong U.S. economy. The impact of gas prices on household budgets has had severe consequences for the economy in the past. For example, during the 2008 financial crisis, a sharp increase in oil and gas prices contributed to a steep economic downturn.
Similarly, significant gas price hikes in 2011 and 2014 negatively impacted both consumer spending and economic expansion. The impact on households and businesses is akin to a Federal Reserve tightening, as it curtails spending that would otherwise stimulate economic growth.
The Economic Impact of Rising Gas Prices
When gas prices go up, households have fewer dollars to spend on other goods, similar to the effect of higher interest rates. This makes borrowing more expensive and prompts people and businesses to cut back on spending. Therefore, rising gas prices effectively tighten household budgets, which leads to fewer non-fuel purchases and potentially slower economic growth. Also, the Fed wouldn’t welcome the impact of higher fuel costs on already-elevated inflation numbers.
This information holds significance as oil prices are on a rapid incline, nearing $90 a barrel. The 21% surge since the start of the year has escalated the expense of refilling gas tanks to its peak, draining wallets at the highest rate in five months.
“It’s the most significant threat to the economy,” stated Mark Zandi, the chief economist at Moody’s, in a recent interview with CNN. Referring to the surge in gasoline prices, Zandi emphasized, “Nothing inflicts more rapid damage to the economy.
Where are Petroleum Prices Going From Here?
The trajectory of petroleum costs and associated goods like gasoline remains uncertain. Geopolitical events, which are challenging to predict, largely influence the pricing pressures.
Last month, drone strikes on oil refineries situated deep within Russia were partially responsible for the surge in oil prices. The spotlight has once again turned to oil-producing nations in the Middle East, given recent fatal military actions that have the potential to cause market disturbances and shipment delays. Swift resolution of these issues appears improbable at present.
As evidenced in the US Crude Oil chart below, we can observe that oil prices have risen by 21.77% year-to-date. Currently, the price of Crude oil per barrel sits at $86.77.
Key Takeaways
Higher fuel prices limit the spending capacity of households and businesses without providing any additional benefits. In this way, more expenditures on the same amount of gas could have an economically numbing impact. At the same time, it may elevate inflation, delaying potential interest rate cuts by the Fed.
