Off the Charts: Shock and awwww...

Oil prices have risen more than $20 from their lows earlier this year and US gasoline prices have jumped, raising fears of another seventies-style “energy shock” that weakens the economy and forces the Federal Reserve into further monetary tightening.

Higher energy costs certainly could add to other factors - ebbing excess savings, student loan repayments, and slowing wage growth - in slowing consumer spending, particularly near the bottom of the US income distribution.

But when we put oil prices in real terms - adjusting them for the rate of overall inflation over time - it is clear that today’s surge pales in comparison with last year's move, let alone some earlier historical precedents: 

And the share of US consumer spending that is devoted to energy has fallen precipitously for decades, implying that gasoline prices would have to rise substantially - perhaps to more than twice today’s levels - before the typical household might experience economically-meaningfully negative effects.

We think Fed officials will follow a well-established historical playbook in “looking through” short-term fluctuations in commodity markets over the months ahead. And - although higher gasoline prices could weaken sentiment and raise consumer inflation expectations - deeper fundamentals are likely to keep driving household spending decisions. 

The economy will experience this energy shock, but might not feel much of the awe. 

Interactive versions of these charts can be found here