Traditionally, gasoline prices in the United States peak just ahead of the July 4 holiday as consumers get ready to hit the road and vacation season begins.
But this year is shaping up to be a different story. Because of supply conditions and easing demand, domestic gasoline prices peaked at $3.67 per gallon for regular on April 18 and have declined since then.
Now, they are poised to decline even further. Wholesale gasoline prices suggest that the price at the pump will fall another 10% from the current $3.44 per gallon. This will surely bolster U.S. household balance sheets heading into the summer spending season.
Additionally, this easing should help stabilize the U.S. 10-year Treasury yield in the 4.20% to 4.40% range as investors ascertain the direction of the economy, hiring and inflation, which we think will continue to cool.
Our outlook on rates has not changed since the start of the year. We expected the yield on the 10-year Treasury to move between 4% and 4.5% with occasional moves above and below, and for the 10-year to finish the year at or near 4.25%. So far, the average yield on the 10-year through Monday has been 4.29%.
Read more of RSM’s insights on consumer spending, the economy and the middle market.
While we do not think that falling gasoline prices will materially affect consumer sentiment surveys—that is a function of what political tribe one belongs to—it will affect consumer spending because of the increase in discretionary income that follows falling gasoline prices.
Perhaps more important, falling gasoline prices will affect inflation aggregates that the Federal Reserve uses to formulate policy. Falling gasoline prices dampen top-line inflation, and that will support the case for rate cuts this fall.
The takeaway
The United States produces 13.2 million barrels of oil a day, near the record of 13.3 million reached in December. Despite OPEC countries’ attempt to limit production, new supply is finding its way to the global market by non-OPEC oil producers like the U.S., Canada, Norway and Brazil.
In our estimation, the risk is that more supplies are on the way, which implies lower oil and gasoline prices heading into the end of the year.
