Consumers are paying higher prices for just about everything right now. But higher energy prices — particularly for gasoline — are often the most visible examples because the cost is prominently displayed on so many street corners.
Across the country, the cost of gasoline has swung upward, with some areas contending with prices over $5/gallon. Further, because so many facets of our economy are connected through energy, the effects of these higher prices will likely continue to linger for consumers beyond their transactions at the local gas station.
How did we get to this point and what does this mean for the U.S. consumer’s bottom line? Here are our reflections and predictions.
How we got here
Crude oil and natural gas prices were already high entering 2022 as rebounding global demand for energy commodities occurred faster than supplies have been able to keep up.
But on Feb. 24, prices spiked further following Russia’s invasion of Ukraine. Russia is a major producer and exporter of crude oil and natural gas for Europe. Subsequent sanctions against Russia drove energy prices higher as countries looked elsewhere to purchase their crude oil.
In the U.S., crude oil accounts for about 54% of the cost of gasoline at the pump, according to Energy Information Administration data (EIA). The limited supply of this commodity thus drove up the national average for gasoline in the U.S. to over $4/gallon, according to EIA data.
Source: U.S. Energy Information Administration
The impact on U.S. consumers
Sanctions and other efforts to reduce sales of Russian commodities will likely limit their contribution to global energy supplies, over the intermediate term at least.
These developments will likely affect European consumers more significantly, as they are more heavily reliant on Russian energy. However, American consumers will likely see impacts too:
- Gasoline: Americans allocate about 3% of their spending toward gasoline, according to the Commerce Department. How much each consumer will have to pay in the coming months depends on their vehicle’s mileage and number of miles driven. But the average driver1 will likely pay approximately $40 to $50 more per month for gasoline this summer relative to last year, according to our computations.
We believe consumers will likely spend about $50 to $75 billion more for gasoline this year (relative to 2021) based on full-year gasoline prices of approximately $4/gallon.
- Utilities: Commerce Department data shows that Americans allocate 2.5% toward home heating and other home energy needs. Household utilities (gas and electric), could cost consumers an added $20 to $30 billion this year, representing an approximate 7% to 12% increase.
- Secondary effects: Consumers will also bear the cost of higher transportation and distribution costs for everything from groceries and apparel to furniture and lawn care.
- Economic growth: In our view, higher energy prices could cost the U.S. economy about half a percentage point of potential growth this year.
How you can prepare for rising prices
Along with rising energy prices, inflation has also emerged as a key global financial concern due to ongoing supply-chain problems and strong consumer demand. Importantly, price changes can have a material impact on long-term financial plans.
Talk with your Ameriprise financial advisor about if your portfolio has an adequate cushion to account for higher-than-expected inflation.