Soaring Oil Prices and Rising Treasury Yields Strain U.S. Consumers
- U.S. crude prices exceeded $105 per barrel amid increased conflict in the Middle East.
- The average household has incurred an additional $1,760 in costs since the U.S.-Iran conflict began.
- The 10-year Treasury yield hit its highest level in 19 years, affecting borrowing costs for consumers.
U.S. consumers are grappling with a significant financial burden as both oil prices and Treasury yields continue to rise during the ongoing conflict between the U.S. and Iran. Crude oil prices recently surged past $105 per barrel, their highest level since mid-May, driven by renewed fighting in the region. This spike is anticipated to translate into elevated gasoline prices at the pump.
According to a report from Moody’s Analytics as of September 11, the average household has borne an estimated $1,760 in additional costs since the onset of the U.S.-Iran conflict. This figure includes more than half, or $930, attributed to rising energy prices such as gasoline and diesel, contributing to a total of over $121 billion extra spent nationwide on energy since the conflict began.
Moreover, higher interest rates comprise another significant portion of this financial strain. Approximately $425 of the total household cost results from increased borrowing costs due to rising Treasury yields, which recently reached their highest point in 19 years. Higher interest rates are expected to complicate affordability for major purchases like homes and vehicles.
Pain at the Pump
The price hikes at the gas station are notable, with the average price for a gallon of gas exceeding $4.32, reflecting a 6% increase from the previous month and a 36% increase compared to a year ago, as reported by AAA. Additionally, diesel prices have also reached record highs, exceeding $6 per gallon—about 70% higher than the same day last year.
Increased fuel prices have provoked concerns among economists that companies might transfer these higher costs onto consumers, particularly affecting prices for essential goods transported by truckers. The University of Michigan’s consumer sentiment survey revealed that 29% of respondents mentioned gas prices as a concern in September, a significant increase from previous years.
Yield Readthroughs
The recent rise in the 10-year U.S. Treasury yield to its highest level since 2007 signals growing investor concerns regarding inflation and government debt management linked to the war. As of this week, the yield is about a full percentage point higher compared to a year ago, casting doubts on consumer confidence in making large purchases.
The average 30-year fixed mortgage rate, which typically tracks the 10-year yield, has also surpassed 7% for the first time in over a year, exacerbating the housing affordability crisis across the nation. The Atlanta Federal Reserve’s home ownership affordability index has fallen to historic lows, indicating that higher mortgage costs significantly affect potential homebuyers.
As companies face increased borrowing costs, the job market may be impacted, leading to slower hiring processes. High interest rates and tight credit conditions have left many consumers feeling discouraged about making substantial purchases, including vehicles. Recent findings from Michigan’s consumer survey indicate that 44% expect borrowing costs to rise in the next year, a notable increase from previous surveys.
‘Something Has Got to Give’
Economists contend that the escalating energy costs, as a result of the recent conflict, have erased the benefits from increased tax refunds associated with prior government measures. Lower-income consumers, who typically allocate a higher percentage of their income to energy expenses, have been hit harder, exacerbating the disparities in economic recovery often referred to as a “K-shaped” economy.
Recent data also shows that inflation is once again outpacing wage growth, which, combined with rising energy prices, leaves consumers facing diminished purchasing power. The personal savings rate has dropped to levels unseen since the Global Financial Crisis, signaling that many consumers are depleting their savings.
There are concerns that if these financial challenges continue, consumer spending—an essential component of U.S. economic growth—may begin to decline. The Bureau of Economic Analysis reported a modest increase in consumer spending of 0.2% in July, suggesting a potential slowdown in economic activity moving forward.
News Courtesy of CNBC
