High gas prices are intensifying inflation and vacuuming up more of Americans’ dollars, yet consumers are still digging deep to spend, powering the economy, at least for now. Recent economic data indicates that while rising energy costs are driving up expenses in sectors like shipping and warehousing, consumer demand has remained remarkably steady.

Rising wholesale costs

The producer price index, which measures costs before they reach the consumer, jumped 6.3% in September from a year earlier. This represents the largest increase in nearly four years. Several factors contributed to this spike:

  • A 20% rise in gas prices fueled monthly increases.
  • Higher diesel prices have made shipping via long-haul trucks and freight trains more expensive.
  • Wholesale food prices rose 1.2% from August to September.

These rising costs for producers could lead to more expensive groceries for households in the coming months as transportation costs are passed down the supply chain.

How are consumers muscle through higher prices?

Despite the pressure from the pump, consumer resilience is helping to maintain solid U.S. economic growth. While many Americans report a gloomy economic outlook, an unusual degree of job security appears to be encouraging continued spending. Jim Baird, chief investment officer at Plante Moran Financial Advisors, noted that while consumers are not happy, they are still spending.

This spending comes even as core inflation, which excludes food and energy, rose to 2.6% annually in September. While gasoline prices jumped 9.1% in a single month, retail data shows that spending outside of gas stations remains a factor in economic stability.

Impact on services and supply chains

Inflation is also showing persistence in the services sector, which includes costs for rent, insurance, travel, and tuition. Prices for services excluding energy rose 0.4% in September. Additionally, the Federal Reserve's Beige Book highlighted concerns regarding fuel surcharges appearing throughout the supply chain. Some manufacturers have reported that nearly every material purchased recently has arrived with an additional freight surcharge, further squeezing profit margins.

FAQ

What is driving the current inflation?

Rising fuel and diesel prices are increasing costs for shipping, warehousing, and manufacturing, which then spills over into other sectors.

Is consumer spending slowing down?

While some businesses report squeezed profit margins, current data shows that consumer demand has stayed remarkably resilient despite higher costs.