If you have been to the gas station lately, you most likely noticed the higher-than-normal cost to fill up your tank. Have you noticed other price increases in your grocery or utility bills? The COVID-19 pandemic required the federal government to provide massive assistance, including direct payments to citizens and drastic government spending. The Federal Reserve has been printing money to afford these costs, which decreases the value of the U.S. Dollar. The more support that was provided, the more the dollar was devalued.
While some of these actions were necessary to keep the economy alive, the FED is now faced with the task of controlling the multi-decade high pace of inflation. Their primary tool will be tightening policy by raising the fed funds’ interest rates in the coming months. However, other issues have arisen that caused inflation to continue rising, especially gas and oil prices. In this article, we examine the reasons for the recent increase in gasoline prices and the impact of inflation.
Why is the Price of Gasoline Rising?
The Russia-Ukraine conflicts have created geopolitical tensions that are impacting energy prices. Russia is a significant contributor of the world’s supply, and recent sanctions have restricted the exports coming from out of the country.
This lack of supply has caused energy prices to rocket higher. The prospect of a major war has had very negative impacts on the market, and consumers see the impact at the pump. Wars typically cause high inflation since additional resources and funds are allocated to this need rather than supporting other areas of the economy. If the geopolitical issues are resolved, we can see energy prices come back down, but we expect a higher-than-average inflation level over the next few quarters.
The Impact of Gas Prices on Your Budget
Individuals and businesses should be planning for these increased costs within their spending budgets. For example, individuals who drive further for work or those planning a road trip should be adjusting their spending plans to include higher gas prices. This means that other expenses may need to be reduced, or the worst-case scenario would be reducing retirement savings to afford these higher costs.
Businesses may have a tough time adjusting to this cost since it is one of the most significant expenses for many companies. Company vehicles and fleets may be more expensive, and we could very well see an increase in shipping costs. This will cause pressure on the company’s profit margins, so they potentially may make less revenue during this high inflationary time. Also, we believe the higher cost of living may cause workers to demand higher pay, which would put further pressure on business margins since the cost of labor may increase.
Gas Prices and Inflation – Key Takeaways
- Recent inflation has reached multi-decade highs since the recovery of the COVID-19 pandemic.
- Oil and gas prices continue to rise dramatically due to the current geopolitical tensions.
- These higher prices will require individuals and businesses to reassess their current budgets.
Speak With a Trusted Advisor
If you have any questions about Market Seasonality, your investment portfolio, taxes, retirement planning, our 401(k)-recommendation service, or anything else in general, please call our office at (586) 226-2100. Please also reach out if you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation.
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Best Regards,
Zachary A. Bachner, CFP®
with contributions from Robert Wink, Kenneth Wink, and James Wink
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