Economists use two terms to describe the adjustment of people’s consumption when prices rise too much – ‘Demand Distortion’.
This means, when the price of a commodity exceeds historical norms for an extended period of time, it literally destroys demand for that commodity.
It would not be out of place to apply the term ‘demand destruction’ to US consumers now that oil prices are rising.
On June 14, the price of petrol in the country was more than five dollars per gallon.
This week, the price fell by 13 percent to just $4.32. That is, the signs of demand destruction are all there.
President Biden took to Twitter on Monday to celebrate the drop in oil prices,
saying the average American household is now saving $70 a month on fuel compared to when oil prices were at their peak.
What he didn’t mention, however, was that oil prices are now up nearly 37 percent compared to this time last year. At that time the price of fuel was only 3.15 dollars per gallon.
The dramatic increase in prices over the past year has changed the lives of many drivers.
According to a new survey by the American Automobile Association (AAA), nearly 64 percent of Americans say they have made changes to their daily lifestyle
since March due to higher oil prices, and 23 percent admit to a “major change.” Eighty-eight percent of Americans say they now drive less,
74 percent say they try to fit work into one trip, and 56 percent say they cut back on shopping and eating out.
Only 2 percent of those surveyed said they now use electric vehicles because they can’t keep up with fuel costs.
Additionally, 13 percent said they bought more fuel-efficient cars, and 16 percent said they carpooled with neighbors or friends.
AAA’s survey was conducted between June 23 and 27 and 1,200 American adults participated. In a report accompanying the study’s release
AAA said it fears oil prices will remain “volatile in the near future” and that consumers should bear in mind paying “higher prices than in previous years”.
Jay Hatfield, chief executive and portfolio manager at Infrastructure Capital Partners investment management firm
told Fortune in March that demand destruction will keep gas prices nationally above $5 a gallon, and AAA’s survey is the first evidence of that trend.
Americans are struggling with four decades of high inflation. Everything from coffee to rent is being affected.
As a result, their confidence in the economy is decreasing, forcing them to cut spending.
Consumer confidence hit a record low in June, according to a University of Michigan survey.
The Conference Board’s consumer confidence index showed its third straight month of declines on Tuesday.
“Looking at inflation and inflation, spending and economic growth will be a major headache for consumers over the next six months,
Lynn Franco, senior director of economic indicators at the Conference Board, said in a statement.