Analysis: The oil shock is coming, but the United States may have already paid for it

WASHINGTON, March 10 (Reuters) – The gush of money the U.S. government poured into family bank accounts during the coronavirus pandemic, credited with accelerating the rebound from the health crisis, could now help limit economic damage of the Russian invasion of Ukraine and give the Federal Reserve more leeway to raise interest rates.

As analysts began to analyze what sky-high oil prices and new uncertainty could mean, a common theme emerged: U.S. consumers could get ripped off at the gas pump, but will likely be able to sustain a large part of their planned spending on other goods and services due to accumulated savings from COVID-19 pandemic spending programs that totaled approximately $5 trillion.

The war in Ukraine is a shock, they note, but one against which the United States may have unwittingly insured itself.

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“Household savings could help consumers maintain their spending volumes in the face of associated price increases,” JPMorgan economist Daniel Silver wrote this week, noting that every 10% increase in oil prices would cost consumers $23 billion more every year.

Households “have accumulated about $2.6 trillion in ‘excess savings’ in recent years relative to the pre-pandemic trend, which, all things being equal, could be enough to cover even a sustained 50% surge in oil and natural gas prices for many years to come,” Silver wrote.

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U.S. consumer price data released on Thursday showed the pace of annual price increases jumped to 7.9% last month from 7.5% in January. The increase was driven by energy and food costs, but still failed to reflect the weight of commodity price increases seen in the two weeks following Russia’s invasion of Ukraine. . Read more

The monthly pace of price increases for some key commodities eased, a development Fed officials had been hoping for as they searched for signs that headline inflation would begin to moderate.

But given the uncertainty stemming from the conflict in Ukraine, the US central bank should keep a cautious eye on inflation. Between the rising cost of oil and the consumer price index rising at the fastest rate since the early 1980s, investors now expect the Fed to raise its overnight rate. day by 1.75 percentage points this year. That would mean a quarter-point increase in each of its remaining seven policy meetings in 2022. The next meeting is March 15-16.

“The Ukraine/Russia conflict threatens to disrupt the Fed’s tightening plans this year,” said Seema Shah, chief strategist at Principal Global Investors. “But … The Fed cannot afford to wait and see how financial conditions react to the geopolitical conflict.”

The United States and its Western allies responded to the February 24 invasion of Ukraine with punitive sanctions against Russia, the world‘s largest exporter of oil and petroleum products combined, adding to rising oil prices . The price of U.S. West Texas Intermediate (WTI) crude briefly hit $130 a barrel, from around $92 before the dispute, and traded at $111 on Thursday.

The average U.S. price for regular unleaded gasoline hit a record high of $4.25 a gallon, though that’s about $1 a gallon below the inflation-adjusted peak.

While this indicates that inflation is likely to rise further, it is less clear what this will mean both for the Fed, as it debates how quickly to raise interest rates, and for the US economy in the future. out of the pandemic.

Some past oil shocks, such as that of the 1970s, were associated with more persistent inflation that prompted the US central bank to respond with aggressive rate hikes. Others, like the brief spike during the Gulf War in the early 1990s, accompanied Fed rate cuts as core inflation was expected to decline.


The US economy may have room to manoeuvre. Growth at the beginning of the year was strong, and even if high oil prices are slowing things down, the result for the year should still be solid – not the weak growth and rising prices of true “stagflation”. “.

“The United States has become less sensitive to energy shocks,” with a steady decline in the share of income spent on energy, Bank of America economists wrote in a note. “With the Omicron cases fading, the reopening of the service sector has resumed… The savings surplus accumulated over the past two years can fund this rebound.”

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Research on past oil shocks gives an idea of ​​what to expect. Even as gasoline prices rise, fuel consumption and driving tend to stay flat, partly out of necessity — commuting, driving to work, or family chores — as well as choice.

Household budgets then adapt. A 2008 study of times when gasoline prices were high found an increase in low-cost purchases at grocery stores and substitution with cheaper brands.

One possible indicator of such a move: shares of discount chain Dollar General Corp (DG.N) have risen about 9% since the start of the war in Ukraine, outpacing the broader market.

Nik Modi, tobacco and household products analyst at RBC Capital Markets, said there was already evidence in late February before the invasion that smokers were retrenching for cheaper cigarettes, a trend that is likely to continue as as gasoline prices rise. Prices at the pump had risen nearly 30 cents a gallon since the start of the year until the Russian invasion. They’ve gone up another 70 cents since then.

Yet high-frequency restaurant and travel data so far show few signs of consumer withdrawal.


Company officials who might otherwise expect fallout from higher gasoline prices said they hoped this time would be different.

Some studies have shown that rising gas prices cause families to at least put off larger purchases, but “the effect of that might be a bit more muted in this environment than it may have been.” been in the past,” David Denton, chief financial officer of home improvement chain Lowe’s Cos Inc’s (LOW.N), said at the UBS Global Consumer and Retail conference on Wednesday.

“In the past, when gas prices went up, demand in that industry kind of went down a little bit,” Denton said, but working from home in particular may have isolated consumers going before at work.

Other pandemic dynamics may also be at play. Transit use remains depressed but may be an acceptable option for former commuters as COVID-19 infections decline. Credit card balances are lower, providing financial space for consumers willing to spend now that social life has resumed more fully.

Additionally, economists and officials have noted that higher oil prices now have upside potential in the United States, with the hit to consumers offset by rising employment and investment in oil production. national energy.

“Oil prices are expected to rise much further from here to seriously threaten the recovery in consumption,” wrote Michael Pearce, senior US economist for Capital Economics. “For the broader economy, any hit to consumption should be mostly offset by increased investment in shale production.”

Pearce said there may even be unintended benefits for the Fed. If rising gasoline prices dampen consumer demand for certain goods and services, it could dampen inflation by bringing demand closer to available supply.

“To the extent that this means domestic demand is weaker, we should see less upward pressure on wages and service prices,” Pearce said.

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Reporting by Howard Schneider Additional reporting by Siddharth Cavale in Bangalore and Jessica DiNapoli in New York; Editing by Dan Burns and Paul Simao

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