Three effects of higher gas prices
Summer is just around the corner, which means it’s time to start planning those summer vacations. But, some may want to think twice before planning that long road trip.
Average U.S. gas prices are climbing, and summer gas prices are predicted to spike to the highest level in four years. Parts of the increase are attributable to seasonality, higher taxes, and wider retail margins, but a large portion of the rising gas prices are attributable to changes in crude oil pricing, driven by accelerated economic growth.
The U.S. Energy Information Administration (EIA) estimates that average U.S. gasoline prices could exceed $3.00 per gallon by the start of the summer. Here are three takeaways, given higher prices:
U.S. average national gasoline price
Source: Bloomberg, as of 5/16/18.
1. Smaller slush funds
This year, particularly this summer, higher gas prices may weigh on consumers, especially lower-income households, who spend a disproportionately greater amount of their income on gasoline and heating oil. Fortunately, however, personal tax cuts have provided an extra tax buffer to help mitigate the effects of the rising costs.
Some estimates suggest that U.S. gasoline at $2.90/gallon would effectively wipe out the tax cut for the bottom third of income earners, and reduce the total benefit of personal tax cuts by half. The combined effect could mean less discretionary spending.
2. An active manager’s opportunity
Some consumer-related sectors are more exposed to swings in gas prices than others. An active manager may be able to align themselves with sectors that will be less vulnerable to higher gas prices.
3. More positives than negatives
Consumers take a hit from higher gas prices – offsetting some of the tax benefits. Despite higher prices, however, household spending is still solid and retail sales are up, driven by a favorable labor market (low unemployment and rising wages), low debt service costs, and positive sentiment. Business capital expenditures and increased government spending, meanwhile, remain very supportive of continued growth.
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