At least on the surface, the big declines in gas prices we’ve seen over the past year seem like an unalloyed good. We save money at the pump, and we have more to spend on other things, But the cheap gas has serious hidden costs—more pollution, more energy consumption, more crashes and greater traffic congestion. There’s an important lesson here, if we pay attention.
US macroeconomic forecasters are usually very upbeat about any decline in gasoline prices.
Because the US is a big importer of petroleum, a decline in oil prices benefits the US economy. Lower oil prices reduce the nation’s balance of trade deficit, and effectively put more income into consumer’s pockets, which helps stimulate the domestic economy. In theory, declining gas prices should have the same stimulative effect as a tax cut. Whether that’s true in practice depends on how consumers respond to changing gas prices. Some of the positive effect of the decline has been muted by consumer disbelief that price reductions are permanent. Earlier this year, surveys by VISA showed that 70% of consumers were still wary that prices could rise.
But cheaper gas has does free up consumer budgets to spend more in other industries. Using data on credit card and debit card purchases of households, and looking at variations in spending among households that spent a little and a lot of their income on gasoline, and observing how spending patterns changed as gas prices fluctuate led the JP Morgan Chase Institute to predict that the bulk of savings from lower gas prices go to restaurant meals, groceries and entertainment.