How higher oil prices could push US consumer confidence lower

Christopher Dembik

Head of Macro 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.

Enlarge
Enlarge

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. 

Enlarge

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)