How higher oil prices could push US consumer confidence lower

Christopher Dembik

Head of Macro Analysis, Saxo Bank Group
Christopher Dembik joined Saxo Bank Group in 2014 and has been the Head of Macro Analysis since 2016. He focuses on delivering analysis of monetary policies and macroeconomic developments globally as defined by fundamentals, market sentiment and technical analysis.

Since the election of President Trump in November 2016, US regular gasoline prices have risen by around 65%. Crude oil prices and US CPI tend to evolve in the same direction over time, which is not much of a surprise. After all, significant fluctuations in oil prices lead to major swings in headline price inflation due to the fact that oil fuels a majority of transportation needs and is a key raw material used in a wide range of consumer products.

We have seen the effects of major oil-price changes following the protracted decline that started in mid-2014.

That being said, we should naturally expect a transitory boost to US headline CPI in the coming months. It may not change much in terms of Federal Reserve sentiment since it focuses more on core CPI, but it will certainly affect consumer behaviour if prices continue to rise.

Generally speaking, higher oil prices are passed on to consumers which ultimately curbs disposable income (with lower-income individuals hit particularly hard). The current rally in crude has not significantly impacted consumer confidence yet, as we can see in the chart above. US consumer sentiment is still close to its pre-crisis level; the main reasons for this are tax reform, the consumer lending, surge and the labour market performance, which has positive spillover effects on consumer confidence.

The tax cuts have temporarily offset increases at the pump and, in previous years, Joe Sixpack often resorted to credit in order to maintain his purchasing power. However, as a consequence of higher interest rates and tightening credit conditions, access to credit is more complicated and the most fragile households are already starting to face serious difficulties, as evidenced by higher delinquencies rates (automotive loans, credit cards, et cetera). 

Outside of the US, the low USD exchange rate has helped to mitigate the consequence of higher oil prices and, in many developed countries – notably in Europe – governments have implemented systems devoted to cushion rising gas prices.

The risk with the current oil rally is that higher prices will start to produce adverse effects. Consumption shows signs of weakening after a first quarter that saw the slowest pace of consumer spending in nearly five years – if oil prices do come to impact this metric, the effects could be severe.

Some data are already confirming that fear: due to oil prices, the last Bloomberg weekly comfort index declined to 55.8 from 56.5 – the biggest drop since September 2017.

The worst-case scenario, which would see higher oil prices substantially affecting the pocketbooks of consumers and pushing the Fed to hike more than expected – has not yet happened. With a November midterm election looming, the Trump administration will do its best to avoid an unwanted spike in gasoline prices and can count on Saudi Arabia as the Kingdom has recently confirmed its commitment to stable oil prices around the threshold of $80/barrel.  

However, as we have learned the hard way in recent years, forecasting the evolution of oil is a complicated task in which we end up being wrong more often than we would like. What we know for sure is that higher oil prices are another reason to proclaim that the Goldilocks era has reached its end.

We are entering into a new economic paradigm: the USD is rising, economic conditions are less favourable (especially in the US), and geopolitical risks are pushing both oil and risk aversion up. 

Access both platforms from your single Saxo account.

Disclaimer

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice or a personal recommendation and does not take into consideration your objectives, financial situation and needs. Saxo Capital Markets UK Limited will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information. We assume no liability for errors, inaccuracies or omissions contained within these materials.

It is important that you understand that with investments, your capital is at risk. We offer leveraged products which carry risk and can result in losses that exceed deposits. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more here.

Additional Key Information Documents are available in our trading platform.

Saxo Capital Markets UK is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871

Please read our full disclaimer - https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer