Nice write up. The part I find especially interesting is how the wealth effect and energy inflation can interact.
If households are increasingly funding consumption from appreciated financial assets, then economic resilience becomes more dependent on markets staying healthy. At the same time, another oil or refined-product shock can raise gasoline, transportation and ultimately broader household costs without necessarily giving the Fed much room to respond.
From an energy perspective, that is why I increasingly view oil and fuel prices as more than a sector variable. In the current setup, they can become a transmission mechanism between geopolitics, inflation, rates and consumer spending.
Really helpful piece. I liked how you tied it all together: even with inflation cooling a bit, households are still squeezed because borrowing got more expensive and more spending now depends on investments holding up. That big picture made it click for me.
The detail that spending rose 0.9% while income grew only 0.2% stands out, because if more of that gap is funded by selling investments, consumption becomes much more sensitive to a market drawdown than the GDP revision suggests.
I’d be curious how much of those investment withdrawals fund discretionary spending and how much cover regular bills. The first seems easier to cut if markets fall. The second raises a tougher question: how many households would have to keep selling into a downturn just to cover their monthly expenses?
Brilliantly written. Well done.
Nice write up. The part I find especially interesting is how the wealth effect and energy inflation can interact.
If households are increasingly funding consumption from appreciated financial assets, then economic resilience becomes more dependent on markets staying healthy. At the same time, another oil or refined-product shock can raise gasoline, transportation and ultimately broader household costs without necessarily giving the Fed much room to respond.
From an energy perspective, that is why I increasingly view oil and fuel prices as more than a sector variable. In the current setup, they can become a transmission mechanism between geopolitics, inflation, rates and consumer spending.
Very thoughtful piece.
Really helpful piece. I liked how you tied it all together: even with inflation cooling a bit, households are still squeezed because borrowing got more expensive and more spending now depends on investments holding up. That big picture made it click for me.
The detail that spending rose 0.9% while income grew only 0.2% stands out, because if more of that gap is funded by selling investments, consumption becomes much more sensitive to a market drawdown than the GDP revision suggests.
I’d be curious how much of those investment withdrawals fund discretionary spending and how much cover regular bills. The first seems easier to cut if markets fall. The second raises a tougher question: how many households would have to keep selling into a downturn just to cover their monthly expenses?