Higher Oil costs threaten consumption – ING

ING economists Carsten Brzeski and Franziska Biehl argue that rising Oil prices are quickly eroding Eurozone household purchasing power, especially via fuel. They stress that driving behaviour has largely normalised since the pandemic, limiting adjustment, while higher excise duties and mileage patterns mean a growing share of disposable income will be absorbed by fuel, potentially weighing on private consumption and confidence.

Fuel-driven squeeze risks Eurozone consumption

“Looking at driving behaviour in recent years shows that cutting fuel costs by simply driving less is unlikely. Significant deviations from the long‑term average only occurred during the pandemic years, when widespread working‑from‑home arrangements reduced the need to commute. Gasoline prices were not a motive.”

“Since then, mileage patterns have started to normalise, suggesting limited scope for households to offset higher prices by changing their driving habits.”

“Ultimately, this implies that eurozone households will once again need to devote a larger share of their disposable income to fuel, with German households facing the largest increase. For them, the share of disposable income spent at the fuel pump is expected to rise to 3.5%, up from 2.8% last year. Overall, the share of disposable income devoted to fuel ranged from around 2% in the Netherlands and 4.5% in Portugal last year.”

“Although we currently assume in our base case scenario that the impact of the war in the Middle East on markets, and thus on the eurozone economy, should not be long-lasting, the recent rise in energy prices is likely to put additional strain on consumer confidence, which is already markedly low. Given the old adage that gasoline prices rise like a rocket but fall like a feather, it is not just confidence that is being hit, but actual purchasing power.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)