An oil shock is coming, but US may have already paid for it

The gusher of money the US government poured into family bank accounts during the coronavirus pandemic, credited with speeding the rebound from the health crisis, may now help limit the economic damage from Russia's invasion of Ukraine.

As analysts have begun parsing what sky-high oil prices and new uncertainty might mean, a common theme has emerged: US consumers may get gouged at the gas pump but will likely be able to maintain much of their expected spending on other goods and services because of the savings accumulated during the last two years thanks to emergency federal programs totaling about $5 trillion since the spring of 2020.

The war in Ukraine is a shock, they note, but one the United States may have unintentionally insured itself against.

"Household savings could help consumers maintain spending volumes in the face of related price increases," JPMorgan economist Daniel Silver wrote this week, noting that each 10 per cent increase in oil prices would cost consumers an additional $23 billion each year.

Households "have accumulated about $2.6 trillion of 'excess saving' in recent years relative to the pre-pandemic trend, which all else equal could be enough to cover even a sustained 50 per cent surge in oil and natural gas prices for many years to come."

US consumer price data due to be released later on Thursday is expected to show the pace of annual price increases jumped to 7.9 per cent last month from 7.5 per cent in January. Even that won't reflect the brunt of commodity price increases in the two weeks since Russia invaded its neighbor.

The full effect will depend on how long the war lasts, how deeply commodity markets are disrupted, and how forcefully the Federal Reserve responds to inflation that was accelerating for reasons beyond oil prices.

The United States and its Western allies responded to the February 24 invasion by imposing punishing sanctions on Russia, the world's largest exporter of oil and oil products combined, adding to the updraft in oil prices. The price of US West Texas Intermediate (WTI) crude briefly hit $130 a barrel, from around $92 before the conflict, and ended at around $110 on Wednesday.

The average US price for regular unleaded gasoline has hit a record $4.25 a gallon, though that is about $1 a gallon below the inflation-adjusted peak.

While that indicates inflation likely has further to climb, it's less clear what it will mean both for the Fed, as it debates how fast to raise interest rates, and for the US economy as it emerges from the pandemic.

Some prior oil shocks, such as the one in the 1970s, were associated with more persistent inflation that prompted the US central bank to react with aggressive rate increases. Others, such as the brief spike during the Gulf War in the early 1990s, came alongside Fed rate cuts because underlying inflation was expected to ease.

The US economy may have some room to give. Growth entering the year was strong, and even if high oil prices slow things, the outcome for the year is still likely to be solid - not the weak growth and rising prices of a true "stagflation."