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Weekly Updates
- Higher fuel prices create growth deflation. Spending more money on fuel means less spare cash to spend on other things. Consumers can cut back on the amount of fuel they buy—for instance, working from home cuts commuting and thus cuts fuel consumption, improving economic efficiency. But overall, data shows that fuel prices mean demand destruction for certain products.
- Normally, demand destruction would encourage consumers to cut back on things like holiday spending. Holidays are a big purchase—over 3.3% of pre-pandemic US consumer spending. Holidays are normally considered “discretionary spending”. Two years of pandemic restrictions have changed consumer behavior, however. Retail sales and credit card data suggests holiday spending is being prioritized.
- The increase in holiday spending is in spite of a significant increase in the cost of travel. Air fares contain a lot of fuel costs (although fuel is usually less than half the ticket price). The increase in demand means that travel companies can pass on higher costs to the consumer.
- The strong demand for holidays, combined with the rising cost, means that spending on holidays may create another round of demand destruction. Consumers seem willing to sacrifice spending on goods to ensure having enough cash for two weeks on a beach somewhere.
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