Gas Price Hikes Could Slow Consumer Spending, Oxford Economics Warns

Gas Price Hikes Could Slow Consumer Spending, Oxford Economics Warns

Rising oil and gas prices, driven by the ongoing conflict in Iran, could significantly impact U.S. household income and consumer spending in March, according to a new report from Oxford Economics.

The forecasting firm now predicts that year-over-year consumer spending growth for March will slow to just 1.9%, down from 2.5% in February. This would mark the weakest growth pace since 2013, excluding the pandemic period. A significant portion of household budgets is now being diverted toward higher fuel costs, leaving less for other goods and services.

“We had expected a boost in spending from a strong tax refund season, but the sharp increase in gasoline prices—if sustained—could offset that benefit,” said Oxford economists Michael Pearce and Bernard Yaros in a March 20 report. As of last Friday, oil price spikes had led U.S. gasoline prices to surge nearly 30% since the outbreak of the Iran conflict on February 28.

The economic ripple effects of the war are likely to widen the gap between low- and high-income households. “The impact will be felt more acutely by lower-income consumers, while higher-income households may be more insulated,” the economists noted. While the labor market may face some pressure, they expect the primary impact to be a slowdown in hiring, rather than widespread layoffs.

In addition to rising oil prices, Oxford Economics is also keeping an eye on other potential risks, such as a sharp correction in equity markets. “A severe market downturn could dampen spending among wealthier households,” the report stated. The analysts further emphasized that any significant rise in layoffs could trigger a more substantial weakening of the economy.