Higher Gas Prices Are Causing Financial Hardship

GALLUP NEWS SERVICE

PRINCETON, NJ -- Last week, the Energy Information Administration (EIA) reported that gas prices nationwide averaged $2.99 a gallon -- up $0.67 from a year ago and twice the average price of $1.49 three years ago in June 2003. Given this context, it is not surprising that three in four consumers (73%) believe that the energy situation in the United States is having a major impact on the U.S. economy according to the new Experian/Gallup Personal Credit Index survey.

More significantly, half of all consumers say that today's high gas prices are causing them financial hardship, while about two in three (64%) say they are cutting back on their other spending. Of course, the hardship being felt as a result of higher gas and energy prices is much greater on lower-income Americans than on higher-income consumers. And, while consumers at all income levels say they are cutting back on other spending in response to the higher gas prices this year, lower-income households are being forced to make the most draconian cut-back decisions -- including how to curb spending on food and other necessities.

Causing Financial Hardship

Two in three lower-income consumers (making less than $40,000 a year) say higher gas prices this year compared to those of last year are causing them financial hardship. More than half of middle-income consumers (making between $40,000 and $75,000 a year) say they also are experiencing financial hardship, while one in three upper-income consumers ($75,000 or more a year) say they are similarly affected.

Consumers Cutting Back

Eighty-four percent of consumers say they feel the need to conserve on their use of energy in response to the high cost of gas, electricity, and other energy sources. Sixty-four percent say they feel they must cut back on other personal discretionary spending as a result of the rise in energy prices.

Three in four lower-income Americans say they feel the need to cut back on other spending in response to higher gas prices. About two in three middle-income consumers feel the need to cut back, while about half of upper-income Americans feel the same way.

Spending Cuts Affect Many Areas

Two in three consumers say today's higher gas prices will make them cut back on their driving. Three in four lower-income consumers expect to reduce their driving, as do 69% of middle-income Americans and 52% of upper-income consumers.

At the top of the list of other consumer spending reductions in response to higher energy prices are the use of air conditioning or heating and eating out; 57% of consumers say they are reducing their spending in each of these areas. Cutting back on vacation plans is the next most likely spending reduction, with 53% saying they have cut back on vacation spending.

Significantly, about one-third of consumers say they have had to reduce their spending on food and other necessities as a result of today's higher gasoline and other energy prices. Nearly half of lower-income consumers say they are cutting back on food and other necessities, while about one-third of middle-income consumers and 14% of upper-income Americans say the same.

As a consequence of higher gas and energy prices, have you done any of the following, or not?

High Gas Prices Could Create a Recession

The impact of higher gas prices on the consumer depends not only on how high prices go, but also on how long prices remain high. Three in four consumers believe today's high gas prices are more of a permanent change than a temporary price fluctuation. Still, making the necessary lifestyle changes required by such a large change in the price of necessities like gas and energy is difficult, particularly for lower- and middle-income consumers.

As consumers first start to cut back, they will try to moderate the impact of higher gas prices by reducing their savings and increasing their credit use. As prices remain high over time, however, consumer balance sheets will force them to cut their spending on other things or enter into financial difficulties. Add increasing interest rates and no real income growth to these energy-related financial pressures and it is easy to see how many lower- and middle-income consumers are experiencing a severe financial squeeze, even as the overall economic averages suggest the economy is doing fairly well.

In a very real sense, the highly regressive nature of today's higher energy costs shelters many upper-income households from feeling how severe the current situation is for lower- and middle-income Americans. But, increased spending by upper-income consumers and businesses can not make up for a significant pull-back on the part of lower- and middle-income households for very long.

At this point, most economic observers seem to agree with the staff of the Federal Reserve Board that the economy will soften during the second half of this year. The hope is that this will produce a so-called "soft landing" for the economy. Given the energy price squeeze on lower- and middle-income consumers and the potential for a severe housing downturn, however, the odds of a recession taking hold by early next year are now higher than they have been for a long time.

Survey Results

Results for the Experian/Gallup Personal Credit Index poll are based on telephone interviews with 3,017 adults, aged 18 and older, conducted May through July 2006. For results based on the total sample of investors, one can say with 95% that the maximum margin of sampling error is ±2 percentage points. In addition to sampling error, question wording and practical difficulties can introduce error or bias into the findings of public opinion polls.