Fuel’s toll on the consumer

By Reuters Staff
June 2, 2008

Below, an interesting chart published in last week’s Daily Economic Commentary from Northern Trust. The shaded areas are recessionary periods.

“The ['gasoline and other motor fuel'] component of consumption expenditures as a percent of disposable personal income…has hovered between 3.3% and 3.8% in the past year…with the April reading at 3.6%. Looking across historical data from 1959, this is the highest percentage of personal income devoted to gasoline and other motor fuel since the early 1980s.

Gas, % of consumer spending

On average, about 2.3% of disposable income was spent on gasoline and other motor fuel during 1985-2000. The nearly 52% jump in the share of gasoline in household budget in recent months is taking a toll on non-gasoline consumer expenditures. A more complete analysis would examine the share of gasoline expenditures across different income groups. Such an analysis should indicate that gasoline expenditures makes up a larger percentage of disposable income at the lower-end compared with the higher income groups.”

The drastic change in the early 1980s is fascinating. It followed Paul Volcker’s move hiking the Fed Funds rate to 20%!  (Incidentally, he was appointed by Carter in August 1979 when the target rate was 11%). Sure enough, the % of disposable income spent on gas declined as oil prices plummeted (see chart at bottom).  Though it sparked a severe, temporary recession in the early 80s, the long-run impact of killing inflation was the longest expansionary period in U.S. history.

Same thing happened in Argentina circa 1991.  After suffering hyperinflation in the 1980s, the government passed a “convertibility” law that fixed the price of the peso to 1 U.S. dollar.  The currency’s value was cemented, leading to increased foreign investment and 10 years of economic expansion.

Historical oil prices

(chart courtesy WRTG Economics)

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