The biggest economic dangers of the war arose from the surge in oil prices and the sharp rise in gasoline prices this triggered. This created a double-edged risk for the economy. On the one side, there was the prospect that higher fuel prices would force consumers to pull back on spending elsewhere in the economy, causing a slowdown in sales that could spread to the labor market, business income, and household income. On the other hand, there was the danger that the higher prices at the gas pump would unmoor inflation expectations, giving rise to persistent inflation.
We’ve argued since the start of the war that the danger of a supply-shock-induced slump was the greater threat. For one, there’s good reason to be skeptical of the idea that household inflation expectations have as much power as the standard theory—the one that holds sway inside the Federal Reserve—posts. The direct empirical evidence for the expectations channel has always been weaker than its proponents think. And the theoretical foundations are, as dissident Fed economist Jeremy Rudd argued in a paper published back in 2021, “extremely shaky.”
Consumers shopped, didn't drop
The retail sales figures released in May were a crucial test. If high gas prices were pulling demand away from other sectors of the economy, we would likely first see it in declining sales. If consumers were weathering the gas price shock, perhaps taking the view that it is likely to be temporary, then retail sales would hold up.
The report released Wednesday showed that sales not only held up, they increased broadly. Eleven of the 13 top categories of sales showed expansion. Sales excluding gasoline rose 0.7 percent. Auto sales, which are particularly sensitive to gas prices, rose at the fastest pace in nearly a year. Even parts of the retail economy that have been weak—like furniture sales—showed strength in May. In the first five months of this year, sales are up 3.7 percent compared with the period a year earlier.
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