Gas, Groceries and Flights: How an Oil Price Shock Could Hit Your Budget Next
Oil prices rose to over $100 a barrel September 9 as the ongoing conflict between the United States and Iran escalated yet again, according to the Associated Press.
With President Donald Trump announcing prices won't go down until after midterm elections, sticker shock may hit your budget far beyond just the price of gas. Airfare, food prices, flights and other everyday expenses can easily be impacted.
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MoneyLion spoke to financial experts about what the potential effects could be on your money and specific budget areas to expect higher prices.
Higher Prices and Reduced Purchasing Power
“What we've seen with oil prices is that it doesn't end with higher gasoline prices,” said Brandon Gregg, certified financial planner (CFP), advisor with BBK Wealth Management. “It passes through to many areas of consumer spending, causing higher consumer prices, reduced purchasing power and weaker economic growth.”
Regarding airfare, per Gregg, the problem is quite straightforward. Higher fuel costs lead to higher fares because they cut into profitability.
Impacts Across the Board
According to Gregg, the difficult thing about an event like this is its pass-through nature.
“Gas rises first which causes distribution channels for consumer goods to spend more,” he explained. “In turn, prices of everyday consumer goods such as food and other necessities begin to rise as these companies pass the extra cost down.”
Leon Schwab, owner of Fair Price Movers, added that the pass-through isn’t uniform.
“Carriers reprice quickly because most of us run fuel surcharges that adjust with published diesel averages, so a long-distance move gets more expensive within weeks,” Schwab said. “Grocery and retail prices lag because there is inventory in the system already bought at the old freight rate. That delay is why households often feel the second wave months after the headlines have moved on.”
The Effects on Household Budgets
The big question may be whether households can handle this.
“A tight budget will only get tighter and if cash flow can't handle these rises, problems will arise,” he added. “When consumers stop spending on goods because of the cost, that will also cut into profitability and affect companies as well. It becomes a vicious cycle: companies navigate costs and prices while consumers navigate what to spend and what not to spend.”
Melanie Musson, a finance expert with Quote.com, pointed out that another common question from consumers is whether interest rates will increase significantly. She said maybe not.
“The Fed is unlikely to raise interest rates because that would further slow the economy, which is not good when the economy is already tipping away from a delicate balance,” she added.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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