Gasoline is nearing an average $5 per gallon across the U.S., but while consumers are feeling the pain, prices are not yet at a level that would tip the economy into a recession, economists said.
Where that breaking point price lies is unclear. Some suggest it would probably not be just gasoline alone that would send the economy into a tailspin. That said, economists say a recession is indeed possible if fuel prices rise to an even higher level and stay there for an extended period of time.
According to AAA, the national average for a gallon of unleaded gasoline was $4.97 Thursday, up about 65 cents in just a month.
Compounding the pinch at the pump is the fact that other costs are rising as well, with inflation this spring running at an 8.3% pace over last year. Surging natural gas prices are creating higher overall energy prices, while food and rents are also climbing.
“I think we’re in a particularly extreme situation right now,” said Harrison Fells, senior research scholar at Columbia University’s Center for Global Energy Policy. “I don’t think many economists would argue sustained $5 gas prices would have minimal effects. I think most of us would agree sustained prices that high with no other policy intervention would be a drag on the economy. Whether or not it’s sufficient to tip us into a recession is a bit of an unknown factor.”
Economists are watching gas prices closely because the pace of the increase has been rapid. Rising fuel prices are noticed by drivers, and the higher cost of gas can impact consumer sentiment and inflation expectations.
Economists note though that rising wages and a strong job market are working as insulation against the higher prices. Unlike 2008, when gasoline soared and the economy fell into a recession, consumers are in much better shape.
“While there’s clearly a shock, and there’s a strain on consumer budgets, the good news is there is support from the healthy labor market and the amount of excess savings that are still outstanding. In 2008, there was zero savings,” said Michelle Meyer, Mastercard’s chief economist, U.S.
Household balance sheets were weak in 2008, and consumers were heavily in debt. “There was minimal savings. … It was much harder to absorb price shocks,” Meyer said.
According to Mastercard SpendingPulse, which measures overall retail sales across all payment types, nominal spending at gasoline stations in recent months has increased at a trend pace of about 30%, compared with the same time in 2019.
Meyer points out that even though gas prices jumped in the last two months, the nominal spending growth remained steady. She said that suggests consumers have cut back on how much gasoline they are buying as they spent the same amount.
“There’s been some pullback in real consumption or usage. That means consumers are trying to make a decision, trying to figure out how to balance their spending priorities,” she said.
Another big difference between now and 2008 is that vehicles are more fuel efficient and…
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