Oil prices have fluctuated widely since the 1970s. Historically, consumers have tended to increase spending on non-oil goods and services when oil prices decline and cut back on such spending when oil prices rise. However, this relationship may have changed more recently. The U.S. oil sector has increased in importance in the last decade, and consequently the United States has become less reliant on oil imports. Moreover, gasoline expenditures have fallen as a share of households’ budgets. As a result, price swings may no longer have the same effect on U.S. consumption.
Nida Çakır Melek and Robert J. Vigfusson look at two channels through which oil price changes affect consumption—the discretionary income channel and the oil producer channel—and provide evidence that the effect of oil price changes on consumption has become more muted. Their analysis suggests changes in oil prices are less likely to yield major changes in consumption, even among lower-income households.
Publication information: First Quarter 2021