Why Haven’t Low Gas Prices Stimulated Retail Sales?

The answer may lie in the question: How long will it be before consumers start to feel the change is permanent?

The price of oil has been relatively low since mid-2014, and — more important for U.S. consumers and their ability to spend money in retail properties — so has the price of gasoline, despite a small uptick in recent weeks. So where’s the boost in consumer spending? It doesn’t seem to have happened, with retail sales expanding but not particularly robustly.

Sylvain Leduc, Kevin Moran and Robert Vigfusson took up that question on behalf of the Federal Reserve Bank of San Francisco in an economic letter published on Monday, “The Elusive Boost from Cheap Oil.” Factors like weak foreign growth and the strong dollar contributed to the weaker-than-expected response, the economists noted, but they posited that the main reason for the muted boost from cheaper gas is that consumers expect the decline to be temporary.

The impact of gas prices on the economy depends not only on the magnitude of the change but also on its perceived persistence. That is, consumer spending is more likely to rise if people believe the decline in gas prices will last for a while. On the other hand, if consumers think lower prices aren’t here to stay, they may simply decide to save what they don’t spend at the pump.

How long will it be before consumers start to feel the change is “permanent”? The answer isn’t any clearer than “eventually.” It would probably take a string of years. In 2015, AAA reported the national average price of gas at $2.40 per gallon, which was the second-cheapest annual average of the past 10 years. Last year’s annual average was about 94 cents per gallon less than in 2014.