Lower-income groups disproportionately hit
When gas prices rev up, people on a tight budget are hit the hardest. Nearly three-quarters of Americans (71 percent) earning less than $30,000 per year say they have cut back on spending due to fuel costs, compared to 43 percent of high earners who make $75,000 or more annually.
In the short term, unless consumers have ways to avoid purchasing gas by using public transportation or driving less, they have no choice but to spend less on other items -- or save less or increase debt.
"In that sense, the rise in gas prices acts like a tax on a family's household budget, and they respond by cutting back on other spending. The end result is when we look at gasoline consumption, it doesn't change very much, but other consumption as we measure it goes down. And overall consumer spending is recorded as having declined," says Chris Varvares, senior managing director and co-founder of Macroeconomic Advisers.
Less spending means slower economic growth
This year, broad measurements of consumer spending have yet to show the effects of higher gas prices.
For instance, retail sales in March were up 0.8 percent and greater than economists' expectations. Also, the gross domestic product report for the first quarter of 2012 showed consumer spending rose to an annual rate of 2.9 percent -- a substantial 0.8 percent increase over the growth seen in the fourth quarter of 2011.
Typically, high gas prices do translate to an economic slowdown. As consumers funnel more cash into the gas tank, they have less money to spend on other products. That change in spending can ripple through the economy with what economists call a multiplier effect.
"The other products that they're not buying, for instance, 'Slurpees' at 7-Eleven, could result in fewer cups being purchased, less ice. Maybe they will cut back on the extra employee in the 4-to-10 shift. It does impact incomes of other firms, and that could impact the employment or incomes of employees," says Varvares.
Ultimately, the effects of high gas prices translate to a reduction in GDP, which is a measure of economic growth.
"If you take the price of (a barrel of) crude and increase it by $10, in a few days it will be reflected in pump prices. That will basically slow down GDP growth by 0.2 percent. But also we've looked at the psychological impacts on consumer sentiment, (which) are pretty significant," says Chris Christopher, senior principal economist at IHS Global Insight, an economic consulting firm.
Model-estimated full effects of a $10 per barrel rise in crude oil prices
(Percent difference from baseline)
|Year one||Year two|
|Real consumer spending||-0.2||-0.5|
|Real disposable income||-0.4||-0.5|
Source: IHS Global Insight.
Higher gas prices make consumers feel bad
While public transportation is a great option for some, it's not a prominent part of life in vast swaths of the country, so consumers are stuck behind the wheel. When gas prices go up, it's impossible not to notice.
One result of all that awareness is consumers feel worse when gas is expensive.
"Even though it is less than 5 percent of disposable income, (consumers) react quite a bit to it," says Christopher.
"Gasoline prices have a higher impact on consumer mood or consumer psychology and a smaller impact on people's actual budgets," he says.
Research by IHS Global Insight has found that a 10 percent increase in the price of gas decreases consumer confidence by 1.4 percent to 1.5 percent.
The good news is that a drop in gasoline prices makes consumers happy -- and that's what is happening now. Gas prices are predicted to stabilize through the summer, which means everyone should have more cash to spend -- away from the gas station.