Big Gas Price Jump, Still a Small Spend

The Fed’s targeted inflation gauge for April hit the wires Thursday, and boy did it give folks the heebie-jeebies. Headlines hyped the Personal Consumption Expenditures (PCE) price index’s jump to 3.8% y/y from 3.5% in March and 2.9% in February, warning it signaled high oil and gas prices’ economic risks.^[i] If inflation itself didn’t knock growth (and presumably stocks), then potential Fed rate hikes would, some argued. Yet the other half of this report—the consumer spending side—shows this is a false fear, a brick in stocks’ wall of worry.

Those fearing high gas prices follow simplistic logic: When people have to pay more at the pump, they think discretionary spending nosedives and low-income households rack up credit card debt to make ends meet, tapping them out. Consumer spending suffers, the economy (68% personal consumption, as we are all-too-often reminded) spirals into recession, and stocks tumble.^[ii]

Only, that didn’t happen in April. Inflation-adjusted (aka “real”) consumer spending inched up 0.1% m/m, with plenty of discretionary goods and services rising—including home furnishings and appliances, recreational goods, recreation services and hospitality.^[iii] Tapped-out consumers generally don’t redecorate, get a new TV, go out to dinner or spend an evening at a ballgame. They hunker down, buying only the essentials. High gas prices may pinch some folks, whom we sympathize with. But this ample leisure spending shows clearly high gas prices aren’t a broad burden.

When you break down the numbers, it becomes clear why gas isn’t such a massive headwind. Nominal spending (unadjusted for inflation) rose 0.5% m/m.^[iv] Spending on gasoline and motor fuel jumped 6.7% m/m and 30.2% y/y.^[v] Big! But this took gasoline from a measly 1.7% of total consumer spending in February (pre-war) and 2.1% in March (gas’s initial jump) to … drumroll … 2.2%.^[vi]

Gas is, therefore, a small expense. But it is a visible spend. At the grocery store, pricier milk can get lost in the shuffle of your receipt, or you can switch to a store brand to take some of the sting out. There are mitigating factors. But at the gas station, you are stuck, and the price is right there, in your face, taunting you. It is on large signs at major intersections. At stop lights, it catches your gaze … $4.59 per gallon, then $5.09 … $6.29! You see your total spend surge toward triple digits, depending on your tank size and regional price and tax differences, as you fill up. It is the pits, and you feel it. Maybe you endure this once a week. Maybe a little less. Maybe a little more! Regardless, gas’s visibility makes it loom large in our collective consciousness, visible and painful.

As a result, society magnifies its economic importance. It seems folks put it in a different bucket than all other regular spending, like utilities, rent or mortgage payments, prescriptions, food, insurance premiums, school supplies, tuition and everything else our modern society runs on. But all that spending is just as important. It all feeds into GDP, and overall spending is soooooo much bigger than spending on gas. This kept chugging along in April, driving PCE’s modest rise.

Yet higher gas prices probably did cause some substitution. Clothing and footwear sales fell, and we imagine household budgeting had a lot to do with it. When the basics get more expensive, it is natural to delay gratification on the nice-to-haves. Auto sales also fell, which may be down to people waiting to see whether high gas prices stick. Give it a couple months and see if something more fuel efficient or an electric vehicle makes more sense.

But this isn’t anything new. Consumer spending is rarely universally up (or down) across all categories. There are always pockets of weakness and strength. Stocks know this is the norm even if headlines occasionally treat it as earth shattering. High gas prices may continue weighing on sentiment, but stocks have been shouting at everyone to get over it since the S&P 500 hit its year-to-date low on March 30. It hit a fresh all-time high yesterday. If we were truly on the verge of a back-breaking recession induced by high gas prices, stocks would show it. Instead, they are saying, move on.