Escalating energy costs may upset consumer balancing act

Rob Fox

April 8, 2026

Key Points

• Expect higher energy costs to boost near-term headline inflation by about 1% and create lingering long-term inflationary effects.
• The spending tailwinds from the “wealth effects” of the escalating stock market and home price appreciation appear to be on pause for now.
• The combination of higher inflation and declining income growth will squeeze the bottom half of earners, hitting those segments of the economy particularly sensitive to discretionary spending.

Despite persistent and ongoing signals of a weakening labor market — declining job openings, weak wage growth, declining labor force participation and minimal job creation — the broader economy has continued to trudge forward like a tractor in low gear. Boosted by massive tech/artificial intelligence investments and a strong stock market in January and February, the GDP likely grew above 2% in the first quarter as the unemployment rate held around 4.4% and consumers maintained spending growth above 2%.

However, surging energy costs will boost headline inflation by about 1% in the coming few months. Their “long-tail” price effects will be felt throughout the year as higher transportation and input costs work their way into every segment of the economy. While news alerts focus on today’s oil prices, oil futures as far out as 2027 have increased by 15-20% despite the recent ceasefire. We believe futures prices represent a realistic, ongoing risk premium for political instability in the Middle East for the foreseeable future. Bombing from the Iran war has damaged major liquid natural gas, refining and petrochemical facilities, and global prices for the array of oil’s end products have skyrocketed. Prices will remain high even when the war officially ends.

Deepening concerns over energy markets have also put a damper on stock price escalation, which was already wobbly due to AI disruption of the software industry and related private credit concerns. Despite the Fed holding the overnight rate steady, mortgage rates have jumped higher in the past month, and home price appreciation appears to have leveled off for the first time since 2012. The stock market and home ownership “wealth effect” tailwinds to spending are likely on pause for now. Consumer confidence is again falling — people are acutely concerned about AI-related job losses (which have yet to be borne out by hard data). Businesses not related to the AI boom are in a wait-and-see mode: Hiring and investment had already flatlined before energy prices shot higher.

We’re not hitting the recession panic button yet, largely because those doing the bulk of consumer spending — higher income/asset-rich households — have ample liquidity reserves and can brush off higher energy costs. And the U.S. is a net energy exporter so higher prices benefit those particular segments of the economy. But the bottom half of earners, with minimal savings, are in a discretionary income squeeze at the moment, caught between rising inflation and shrinking wage growth. Higher energy prices today and tomorrow will take a bite out of real disposable income growth, which is currently barely 1%. Combine that with rising inflation and increasing business apprehension, and we may see declining real purchasing power for the first time since 2022. Consumers will have no choice but to reduce discretionary spending, particularly in the retail goods, food service and hospitality categories.