As oil prices have risen on geopolitical concerns (that have been printed away by central banks in stocks), so gas prices at the pump in the US have risen to their highest for this time of year since 2008 (and that did not end well). We are not alone in our concern as Morgan Stanley’s (and esx Fed) Vince Reinhart warns that a more extreme jump in oil prices would be enough to stall the recovery (lowering real GDP growth by 1.7 percentage points one year out; and perhaps more worryingly, raise CPI growth by about 3.6pp, lowering real consumer spending growth by a full two percentage points).
Gas prices were last this high in the Summer in 2008…
And that did not end well… (especially with wages continuing to drop)
As Morgan Stanley warns,
Whether price increases are temporary or sustained matters most when modeling the contemporaneous effects on the economy of a rise in oil prices. Simulations of a permanent, upward shift in the price of Brent crude of $10/barrel indicate that real GDP growth four quarters out would be reduced by roughly 0.4 percentage points (pp) and that CPI would be higher by about 0.9pp – compared with our baseline. Growth in real consumer spending would be reduced by 0.5pp.
If, however, we model a transitory $10/bbl rise in Brent crude prices (occurring in the current quarter and dropping back to previous levels in the subsequent quarter), the impact results in no net change in the growth rate of real GDP, nearly no net impact on CPI, and no net change in the growth rate of real consumer spending – one year out.
A stress test of our model indicates that a more extreme, sustained $50/barrel jump in oil prices would be enough to stall the US recovery, precipitating a single quarter of sub-1% growth and lowering real GDP growth by 1.7 percentage points one year out. A price surge of that severity would also raise CPI growth by about 3.6pp and lower real consumer spending growth by a full two percentage points.
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