Here's why the 30% surge in oil prices won't derail the economy or consumer, according to Goldman Sachs

California Gas Prices
Gas prices at a Shell station on September 19, 2023 in Burbank, California.Mario Tama/Getty Images
  • Crude oil has surged 30% since its late-June low, helping push up gasoline prices across the country.

  • But Goldman Sachs said the rise in oil prices is a "manageable headwind" for consumers and the US economy.

  • These are the three reasons why Goldman isn't concerned about the surge in oil prices.

Oil prices have surged over the summer months, raising concerns that higher prices at the gas pump could accelerate the economy's descent into a recession.

Higher gas prices, if sustained, should reaccelerate inflation and could keep the Federal Reserve locked in its tight monetary policy stance for longer than expected.

But Goldman Sachs said in a Sunday note that the 30% surge in crude oil since late-June is a "manageable headwind" for consumers and the broader US economy.

"While we forecast consumption growth to slow during the fall and winter, we think higher oil prices are unlikely to cause consumer spending and GDP to decline," Goldman Sachs' Spencer Hill said.

Hill listed these three key reasons to back up his view:

1. The oil price increase is relatively small

"Oil prices have risen by $20 per barrel—compared to +$40 in the first half of 2008 and +$45 in the first half of 2022—and our forecast of retail gasoline prices using futures and wholesale markets indicates that most of the rebound has already occurred," he said.

Hill estimated that the rise in oil prices could represent a drag of 0.7 percentage points on consumption growth in the upcoming quarters, which is manageable, but estimated that the pain would double if oil prices rise another $20 a barrel from here.

2. Higher oil prices offset by falling electricity prices

"The year-to-date pullback in coal and natural gas prices argues for renewed declines in utility bills this fall. We forecast a 1% pullback in seasonally-adjusted electricity prices by November, which would boost real incomes and likely consumption by 0.1-0.2% over the next year," Hill said.

Utility Bills
Goldman Sachs

3. The Fed won't hike interest rates because of higher oil prices

Even if rising oil prices drives a rebound in inflation, it's likely that the Fed will not move to further hike interest rates. That's because sharp moves in commodity prices tend to be short-lived and extremely volatile.

"Chair Powell reminded us at the September press conference that the Fed tends not to react to energy price shocks, and we do not expect the recent oil move to de-anchor inflation expectations and in turn force a policy response. After all, long-term inflation expectations remained broadly stable during the 2021-22 economic reopening despite a 50% cumulative increase in energy prices and two years of 4-6% core inflation," Hill said.

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