Fuel’s toll on the consumer

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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