In simple terms, there are two ways to lower prices: increase supply or reduce demand. The first is expensive and complicated. The latter happens when consumers start to back off because prices have risen too high and individual budgets are limited. That’s what appears to have happened this spring, as Americans saw gasoline prices soar above $5 a gallon and headline inflation surged past four-decade highs.
While that could mean relief at the fuel pump, it could also signal a different kind of economic pain on the horizon.
“This morning’s market action has recession alerts written all over it,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. He put the odds of a recession this year at 99% because “nothing is 100%.”
Oil prices soared to $122.11 on June 8, their highest level since March and about a dollar below their highest level since 2008.
In just two weeks since that peak, oil prices have fallen 16%. Why? It’s inflation, once again, and the Federal Reserve’s campaign to combat it.
Consumer confidence slumped to a record low as consumers grew increasingly frustrated with high prices, according to a closely watched survey released June 10.
On the same day, the government’s main gauge of inflation, the consumer price index, saw its biggest jump in 40 years, with prices rising 8.6% for the 12 months ending in May. That was higher than the April reading, not the direction anyone expected.
That combination of bad news more or less guaranteed that the Federal Reserve would have to raise interest rates more aggressively than it had previously signaled, a reality that rattled investors and sent stock markets crashing.
When central banks raise interest rates, it slows economic activity, reducing energy demand, which drives down gasoline prices (albeit slowly).
Over the weekend, US drivers got a slight price cut, while the AAA average gallon of unleaded gasoline fell below the mark. of $5 after peaking at $5.02 a gallon last week. That price has dropped by a fraction of a penny every day since.
On Wednesday, oil prices continued to fall even after the Biden administration said it would urge lawmakers to suspend the federal gas tax of $18.4 cents a gallon in an effort to ease prices, an action that would be expected would be bullish. on demand
Brent crude, the international benchmark, fell 4% to around $109 a barrel on Wednesday. West Texas Intermediate crude, the US standard, sank 4.5% to $104 a barrel.
Gasoline prices have fallen much more slowly than they rose, reaffirming the adage that prices go up like a rocket and come down like a feather. During the two months prior to last week’s record high, the average AAA price reading rose 58 times in 60 days, adding $94 cents to the national average price. That’s a steady rise of almost $2 cents a day, compared to less than a cent a day the price has dropped since Tuesday.
Chris Isidore of CNN Business contributed to this article.