Oil prices have exceeded $50/barrel, growing 27% since January’s average. In response, the price of gasoline faced by households increased; and when real consumer spending fell at a 4.3% annualized rate in Q4 2008, the rising price of gasoline can be an ominous sign for consumer spending on energy goods.
However, there appears to be a breaking point in gasoline prices that is well-above its current level, $2.10 on 3/30/09, only after which real personal consumption of energy falls as gas prices rise. Before that point, consumers are rather resilient to rising gasoline prices.
The chart below illustrates monthly gasoline prices and real personal spending on energy and services, as measured by the Energy Information Administration and the Bureau of Economic Analysis. There is a nonlinear relationship between the two that peaks around $3/gallon. This means that on average, spending on energy and services – roughly 4% of total real personal spending (RPCE) in February 2009 – rises in response price increases below roughly $3/gallon and falls in response to price increases above $3/gallon.
The nonlinear relationship (the regression equation in the chart) indicates that it would take a jump to about $3.35/gallon to reduce real spending on energy and services below its current level in February 2009 ($341.8 billion).
The regression line has an R^2 = 0.54, which is admittedly weak; but since the price of gasoline has rarely been above $3/gallon, I take this to be a rather good fit. It does suggest, though, that there are factors other than the price of gas that impact real spending on energy and services. But nevertheless, the chart tells us that consumers are unlikely to cut back sharply in response to the 10% bump in gas prices since January.
Originally published at the News N Economics blog and reproduced here with the author’s permission.
Thomas Grennes is a professor of economics at the North Carolina State University and a former visiting faculty member at the Stockholm School of Economics in Riga. His research has dealt with various aspects of international economics, including open economy macroeconomics, international finance, and international trade in agricultural products. Recent research topics have included macroeconomic aspects of the Great Moderation, offshore outsourcing, sovereign wealth funds, and the relationship between government debt and economic growth. Earlier work dealt with emerging market issues in the Baltic countries and Russia and trade and macro policies in Sub-Saharan Africa. Economic history topics include the Columbian Exchange of plants and animals, the effects on food markets of introducing mechanical refrigeration, and the integration of Tsarist Russia into the world grain market. When he is not involved in economics, he enjoys mountain hiking.
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