Gasoline prices are about a cent shy of the never-before-seen national average level of $5 a gallon, and it's unclear how Americans — and the economy — will react.
Why it matters: Prices at the pump play an outsized role in the minds of Americans and are often seen as harbingers for everything from plummeting presidential approval ratings to ugly recessions.
Driving the news: The daily U.S. average national price for a gallon of regular climbed to $4.99 as of Thursday morning, according to AAA.
- And surging prices in the wholesale futures markets — which are leading indicators of retail prices — suggest there's little hope for near-term relief.
State of play: Setting aside the brief, unique COVID recession of 2020, 10 of the 11 recessions the U.S. has experienced since World War II have been preceded by a sharp rise in energy prices.
How it works: In general, steep increases in oil prices — and by extension gasoline prices — are thought to reduce consumption.
- They leave people with less disposable income for everyday shopping after paying higher energy bills and make people uncertain about the future. This leads them to delay purchases of large goods like cars and washing machines, and sock away any extra money they can in precautionary savings.
- All of this can slow down a heavily consumption-driven economy.
Yes, but: Economists who've looked into the relationship suggest the price spikes that have historically preceded recessions could be more a case of correlation, than causation.
- For instance, former Federal Reserve chair Ben Bernanke, and co-authors, have argued in academic work that it's not the energy shock that causes the slump, but rather the Fed's efforts to limit the inflationary impact of the energy price surge, by hiking rates.
Although consumers have never seen prices this high at the pump, we're still a bit short of the record "real," or inflation-adjusted, high.
- That came in June 2008, when gasoline prices hit roughly $5.44 in today's dollars. Some see that previous peak as the straw that broke the American consumer's back.
- High gas prices ate into household incomes, starting a cycle of missed mortgage payments — on, it should be said, incredibly poorly underwritten loans — which then spiraled into a financial crisis and deep recession.
Still, economic pain translates to political pain for the party in power.
- $5 gas threatens to transform a tough political environment into a downright dire one for the Democrats ahead of the midterms.
What's happening: The surge in prices above a never-before-seen big round number will only make inflation a more central issue. Go deeper (<1 min. read)
- Polling by Gallup shows that inflation now ranks as the top economic concern among Americans, the first time it's been in that position since 1984.
- Pew Research recently reported that seven out of 10 respondents see inflation as a big problem.
- "No other top concern comes close," Pew analysts wrote.
Between the lines: Gas prices are hugely important in the car-reliant suburbs, an area where President Biden and the Democrats are thought to have essentially won the 2020 election.
- Crucial swing states such as Michigan, Ohio and Wisconsin are also now seeing some of the largest increases in gasoline prices, according to AAA.
The bottom line: If history is any guide, the outlook for the economy — and the party in power — is getting more uncertain by the day.
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