Drivers are feeling the burden as gas prices soar
Drivers across the country are reacting to rising gas prices as costs rise and frustration mounts in cities like Los Angeles.
Rising gasoline prices and a volatile stock market are raising the risk that a U.S.-Israel war against Iran could hit consumers across all economic sectors in the U.S., potentially undermining a key pillar of economic growth that was expected to soar this year based on stronger income tax refunds, relatively low unemployment and rising asset values.
Looking ahead to this year, analysts feel there is reason for both of America’s so-called K-shaped economic “spurs” to maintain or even increase spending in coming months. The idea is that wealth effects will increase spending by wealthy households, and windfall tax refunds from new exemptions for overtime and tip income will help hourly workers and some service industry workers.
Rather, both parties may be exposed to different kinds of pressures. The average price of gasoline nationwide was more than $3.50 a gallon as of Tuesday morning, up 17% from an average of about $3 before the conflict began, according to data from the American Automobile Association. Prices are now above $3 in all states except Kansas, where they averaged $2.96, and the oil market remains volatile given shipping disruptions in the Strait of Hormuz, with analysts saying $4 gasoline could be possible if the conflict drags on.
Uncertainty about what’s next for stocks to break from highs and household spending driven by rising net worth was exposed on Monday when President Donald Trump hinted at a possible early end to the conflict, sending stocks higher, but softened his words overnight, leaving open the possibility that the conflict could be prolonged with all the attendant risks to global supply chains, commodity markets and corporate profits.
Major U.S. stock indexes were little changed at the start of trading Tuesday morning.
For low-income households, higher gas prices can drain money from other spending categories, and the pain can spread across businesses, causing employment and investment plans to suddenly start to decline in an uncertain environment.
Luke Tilley, chief economist at Wilmington Trust, said: “The longer prices go up, the longer they stay there, the more they actually squeeze consumers and the economy away from the high prices that benefit some companies that increase oil production and increase their profits.” “If the price stays at a certain level for a certain period of time, it becomes a drag on GDP, increasing the possibility of a recession,” he said, referring to the oil price hovering at $85. It is likely to remain in the $100/barrel range for several months, potentially “substantially increasing the risk of a recession in an already very difficult labor market.”
Benchmark Brent crude rose above $116 per barrel on Monday, then fell below $90 per barrel, but rose again on Tuesday morning. US Secretary of Defense Pete Hegseth went beyond ranting and said Tuesday would be the heaviest attack yet on Iran. That’s despite the top commander talking about potentially targeting Iran’s mine-laying capabilities in the Strait of Hormuz, a step toward resuming shipping through the chokepoint where oil movement from the Middle East has all but stopped.
The sudden shift in risks to the U.S. and global economies poses challenges for central bank policymakers. In the United States in particular, officials saw an inherently strong economy facing a balanced set of risks, with inflation still about 1 percentage point above the 2% target but expected to fall, and unemployment appearing stable in a range around 4.3%, but with no clear consensus that it would rise further.
These views are currently being attacked on both sides. The economy already saw unexpected job cuts in February, raising the further risk that conflict-induced uncertainty could make companies more cautious about hiring, while inflation could rise more broadly if higher oil prices raise other costs such as shipping and heating costs.
Even though higher fuel prices may only have a temporary impact on inflation, and broader net price pressures may even ease as consumers shift spending from other areas and overall growth slows, the current situation poses other risks.
In an analysis conducted after oil prices soared in 2022 following Russia’s invasion of Ukraine, Kansas City Fed researchers concluded that increases in high-profile consumer prices, such as gasoline, could have a significant impact on household inflation expectations, which have already been elevated by past inflation shocks. This dynamic continues to be a concern to Fed policymakers, citing it as a reason to keep monetary policy restrictive to keep expectations in check.
Investors still expect the Fed to cut interest rates this year, but the timing could be pushed back after the start of U.S. military action, leading to tensions among policymakers between inflation and growth concerns.
The Federal Reserve is expected to meet next week and keep interest rates unchanged at their current range of 3.5% to 3.75%.
Vincent Reinhart, chief economist at BNY Investments and a former top Fed staffer, said it was too early for the central bank to draw conclusions about the potential economic impact of the conflict. Even concerns about the impact on growth need to be tempered by the fact that the United States’ role as a net energy producer means that higher global prices may mean higher prices for U.S. consumers, but for U.S.-based energy companies it means higher revenues and, potentially, more jobs and investment.
But the longer prices continue to rise, the greater the risks, and sustaining costs per barrel in the low $90s for more than a month is the kind of severe shock that could start to depress consumption and growth.
For the oil crisis to change the direction of the U.S. economy, Reinhart said, “we’re going to have to set prices that are significantly higher than what people are used to.” “It has to be big enough. We’re not quite there yet.”
Report by Howard Schneider. Editing: Andrea Ricci
