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How are Gas Prices Affecting the Economy

How are Gas Prices Affecting the Economy

On average, Americans spend roughly 5% of their disposable income on gas. Although this expenditure is not a large portion of their budget, it is very top of mind; so psychologically, a rise in gas prices can negatively affect consumer behavior. To put it in perspective, a 20% increase in gas prices means that a consumer will need to cut back roughly 1% of their spending elsewhere to make up the difference (20%x5%=1%). So the effect is not huge from a dollar and cents standpoint, but if it affects the consumer psyche such that Americans will delay large purchases and reduce travel, like these Facebook posters suggested. Now for people in lower income brackets where gas is a larger portion of their budget, this increase drastically affects their lifestyle.

Our economy is at a tipping point, still very vulnerable. Gas price increases may be a good sign in that it shows demand is improving but if personal incomes don’t keep up with these increases then it is problematic. If we had a very healthy economy with low unemployment and healthy pay increases these higher commodity prices would be less of a concern.

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