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With Gas Prices Rising, Everyone’s Worried About the $55K-and-Under Consumer: Week Ahead

Rising gas prices spells bad news for retailers.

“The pain U.S. consumers are feeling at the pump will get worse before it gets better,” Ryan Sweet, senior director of the economics team at Moody’s analytics, said on Thursday. “Wholesale gasoline prices lead retail gasoline prices by two weeks and there isn’t any good news. Wholesale gasoline prices point toward an increase in average U.S. gasoline prices from $5 to $5.50 over the next couple of weeks.”

Moody’s revised real GDP forecast calls for a 2.7 percent increase instead of 2.8 percent.

The outlook assumes that energy prices are pretty much at their peak and should fall off as the year unfolds, Sweet said.

Generally, a $10 increase in the price of a barrel of oil results in a $0.25 increase in the price of a gallon of gasoline. “Every penny change in retail gas prices adds or subtracts $1.28 billion in consumer spending over the course of the year,” he said, adding that $6 or $7 a gallon could chill consumer spending.

Moreover, gasoline prices at $6 per gallon would shave a 0.4 percentage point off U.S. GDP growth in the third quarter and 1.2 percentage points in the fourth. “The decline is a function of a reduction in real consumer spending,” Sweet said.

He added if gas prices go up to $7, or over $200 per barrel of oil, the economic situation worsens in the last two quarters, with GDP growth slumping to 3.1 percent in the third quarter and hitting 1.1 percent in the fourth.

For now, there are signs that some consumers are starting to feel the pinch. The Conference Board’s Consumer Confidence Index slipped to 106.4 in May from 108.6 in April. Both components of the Index fell, with the present situation index down to 149.6 from 152.9 and the expectations index, a measure of sentiment six months out, declining to 77.5 from 79.0.

Lynn Franco, senior director of economic indicators at The Conference Board, attributed the decreases to a “perceived softening of labor market conditions.” She noted that purchasing intentions for cars, homes, and major appliances cooled in May, a likely reflection of rising interest rates and consumers purchasing services instead of goods. Moreover, inflation remained “top of mind for consumers,” Franco said.

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The concern over inflation contributed to the decline in the University of Michigan’s Index of Consumer Sentiment to 58.4 from 65.2 for May, versus 82.9 a year ago.

Concerns over inflation and rising gas prices are starting to impact some retailers too.

“Inflationary pressures, including rising gas prices, particularly impacted the spending of Vera Bradley full-line customers with household incomes below $55,000 as well as traffic and spending in our Vera Bradley Direct Channel factory stores for the quarter,” CEO Rob Wallstrom said this week when the company reported first-quarter earnings.

“Customers with higher household incomes remained engaged and spent more than last year,” he said, noting the spending divide among income lines.

For the quarter ended April 30, Vera Bradley widened its net loss to $7 million, or 21 cents a diluted share, from a year-ago net loss of $2.1 million, or 6 cents. Net revenues fell 10 percent to $98.5 million from $109.1 million.

Vera Bradley plans to maximize its travel category, which it said is nearly “back to pre-pandemic levels” and expand its footwear and home assortments for fall and holiday.

And it isn’t just consumers feeling the brunt from rising inflation. CEO confidence has fallen in the second quarter for the fourth consecutive decline. Geopolitical tensions, supply chain issues, rising inflation and even fears of a recession leave them with much to worry about.

And if rising gas prices continue into the fall and holiday, that will impact summer travel and home heating this winter. What that might mean for holiday is anyone’s guess. For consumers, Goldman Sachs retail analyst Kate McShane said they might be forced to put the brakes on apparel spending, since it’s not as critical as putting food onto the table or fuel in the car. For retailers, pulling orders forward could back fire in a worsening economic climate, resulting in massive, margin-killing markdowns.