What Impact Will High Gas Prices Have on the Economy?

September 27, 2023

Surging prices at the pump are further straining household budgets, leaving many analysts to wonder if high gas prices will lead to a decline in consumer spending or even GDP.

Oil prices have jumped by more than one-third since the end of June, due to a combination of supply cuts from OPEC, the resilience of the U.S. economy, and rebounding demand from China after the period of extended lockdowns ended. The nationwide average price for a gallon of unleaded gas stood at $3.85 at the start of the week, according to AAA. That is up from $3.54 at the end of June, when the recent oil rally started, and up from $3.71 during the same week last year.

Luckily, a recent research note from economists at Goldman Sachs said higher gas prices would have a negligible impact on the economy. The analysts base their conclusion on three major factors. The first is that, on a historical basis, the recent increase in oil prices has been relatively subdued. The price of Brent crude, the international oil benchmark, is only up by $20 per barrel since the start of the recent rally. By contrast, prices surged by $45 per barrel in the first half of last year. Secondly, Goldman reasons that higher oil prices could be offset by falling coal and natural gas prices and that the capital expenditures made by energy companies are expected to boost GDP by 0.1% per quarter over the next year. Finally, the analysts note that the Federal Reserve is unlikely to raise rates in response to higher oil prices, especially when core inflation, which excludes energy costs, is trending down.

While higher prices at the pump could erode consumer spending, thus far consumers have been able to maintain spending even as oil prices rise. The bulk of the gain in August’s retail sales was at gas stations, but even when this component is removed, retail sales increased 0.2%, suggesting that households are finding room in their budgets to spend more, even after an increased outlay for energy.

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