Gas in the Tank

The war in the Middle East is dominating headlines. Oil prices have risen sharply and have the potential to change things for economies around the globe, mostly for the worse.

Though the conflict is far away from home, its effects are reaching our soil. Here are a few ways you may see and feel it in your everyday lives.

Brent crude oil was roughly $72/bbl before the war began, it rose to an intraday high of $119.50/bbl on Mar. 8, and is still over $100/bbl as of Wednesday. But since most of us are not buying barrels of oil on the open market, it’s more useful to look at how those prices affect the cost of things like gasoline and airfare to understand how it flows through to consumers.

The chart below shows the spike in both oil and gas prices. Gas now averages $3.98/gallon, up $1 in less than one month. That’s a big move in a short period of time. Luckily, it’s still short enough to only cause a temporary shift in consumer spending, but if it continues, it could become more problematic.

The timing of the spike is unfortunate. We’re entering a heavy travel season, when the price of gas and airfare drives household travel decisions. A number of airlines have already increased their fares — some as much as $215/flight on average — because their only other option is to eat the increased cost of jet fuel, which is up roughly 60%. That may limit the options for families planning spring or summer vacations — or stop them from booking trips altogether.

More Than Its Fair Share

Another way to gauge the impact is to look at the share of consumer spending that goes to energy. As that share rises, consumers have to adjust their spending choices to offset the increase, often foregoing discretionary spending in order to cover necessary costs like energy. Surprisingly, the recent rise in energy prices has had a small effect relative to history and isn’t sounding alarm bells yet. To me, this means we still have time before the economy is irreparably damaged by higher prices.

Higher energy prices also affect inflation at large, which affects how the Federal Reserve might respond in coming months. Below is a look at Personal Consumption Expenditures (PCE), which includes all items (and is more representative of what consumers feel than a measure like Core PCE that removes food and energy.)

Energy accounts for 2% of PCE, and transportation (which includes airfare) accounts for another 3%. Although they’re not the largest components, it’s easy to see how a prolonged elevation in energy prices can start to change things for the economy and the Fed.

Markets were already watching inflation numbers closely before the war, when the Fed was in a rate-cutting cycle. Now the picture is more complicated. The prospect of rate hikes has even entered the conversation and forced investors to rethink their expectations for the year.

The about face has been tough for investors to navigate, even though this is by no means a forgone conclusion. The market’s estimate of rate cuts or hikes can change very quickly.

The Confidence Game

Lastly, the impact of the war is likely to show up in consumer confidence and sentiment surveys, even if for only brief periods. Increased uncertainty, the largest oil supply shock in history, market volatility, and the threat of higher inflation is giving people the jitters. Call it a vibe, call it the feels. It’s a real element that drives the way people spend money.

The war has “only” been going on since early March, so we haven’t gotten any economic data that overlaps, but the University of Michigan consumer sentiment survey will be released on Friday and is the first data set that will reflect changes due to the conflict.

Since that survey’s questions emphasize inflation, I would expect the results to be pretty bleak as consumers are dealing with the threat of higher prices. These datasets can be market moving if they are a big surprise or come in at extreme levels. They’re also quick to reverse if things change, but this week may be a rough report to digest.

At some point, tension will deescalate and oil prices will fall. The real concern is how long this lasts and how much of an impact it will have on consumer behavior. In an economy whose lifeblood is consumer spending, the potential effects cannot be overstated. I am hopeful that we will see some level of resolution in markets before demand destruction takes hold, but that remains an open question.

Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Thomas is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Form ADV 2A is available at www.sofi.com/legal/adv.

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

SoFi isn't recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.