Lower Prices Could Pump Up Consumer Confidence

Discussion
May 26, 2010
George Anderson

By George Anderson

It’s pretty much an annual ritual. The summer vacation season
approaches, with Memorial Day weekend serving as its kickoff, and gas prices
go up. In some years past, prices rose to the point that consumers, particularly
those on the lower end of the economic ladder, altered shopping behavior in
a number of ways, including fewer trips to stores, shopping closer to home,
cutting out items not seen as necessities, etc.

Tom Kloza, publisher and chief
oil analyst at Oil Price Information Service, told CNBC, "When
prices go over $3.25, it begins to cause some real damage."

So, how will
American consumers deal with gas prices actually going down at the pump at
precisely the time they usually go up?

They probably won’t change much at all.
According to CNBC, most consumers
do not drive enough to see much difference in their lives when the average
price of gas falls to $2.793 per gallon as it is now. Mr. Kloza is looking
for gas prices to fall between $2.60 and $2.70 per gallon this summer. Essentially
the same price consumers were paying at the pump last year at this time.

While
a drop in gas prices alone may not be enough to get consumers spending more,
it is another piece of positive news that should add to growing confidence
numbers. The Conference Board has recorded three straight months of rising
consumer confidence.

Discussion Questions: Why do you think consumers adjust spending when gas
prices go up, but apparently not when it comes down? Do you see lower prices
at the pump providing a boost for consumer confidence levels over the summer
months?

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13 Comments on "Lower Prices Could Pump Up Consumer Confidence"


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Gene Hoffman
Guest
Gene Hoffman
10 years 11 months ago

Gasoline is part of our daily lives. As prices rise it signals warning signs that get sent to our brain. Our brain then goes into a cautious and even fearful mood and our spending patterns are restrained. No passion so effectively robs us of objective reasoning as does fear.

When gasoline prices start going down–ha, ha–we don’t feel comfortable tearing down the fence of lingering concern and still spend conservatively for an extended period. But as confirmation sets in our mind that the lower prices will remain, we go back into a more relaxed spending mindset.

Kevin Graff
Guest
10 years 11 months ago

Gene Hoffman hits the nail on the head with his comments above. It’s all about the emotion of buying, and fear is much more of a motivator than is ‘hope’ or ‘savings’. Somehow the idea of having to spend an extra $3 to put gas in your car is more powerful (negatively) than the joy of getting out of the house! Whoever said consumers were rational?

Max Goldberg
Guest
10 years 11 months ago

Gas prices go up much more quickly than they come down. Consumers know this and are leery of rejoicing too quickly when pump prices fall. The nation’s unemployment rate remains high. Job security is nil. Is it any wonder that saving a few pennies per gallon does not set off a consumer spending frenzy?

Dick Seesel
Guest
10 years 11 months ago

Surely the Great Recession that began during the second half of 2008 didn’t begin with the collapse of Lehman Brothers, but with horrendous spikes in gas prices that happened earlier in the year. (The bursting bubble of real estate prices didn’t help, either.) On the other hand, oil and gas prices fell dramatically last year but it didn’t translate immediately to higher consumer spending. There is something of a lag effect, but I agree that falling pump prices (if the trend continues) will help sustain the recovery in other discretionary spending. (It’s like a “tax cut” to consumers, as Larry Kudlow likes to point out.) It’s also helpful to the recovery that money is still cheap, with mortgage rates being at historic lows. All of this should help consumers lead the economy out of a ditch, despite market nervousness about more intangible issues like European sovereign debt.

Susan Rider
Guest
Susan Rider
10 years 11 months ago

Exactly. Consumers get into the mode of watching their pennies and it sticks. Not such a bad thing. This past two years have been considerably worse because everything has gone up and revenue down; investments, job market, etc.

Justin Time
Guest
10 years 11 months ago

Gasoline prices are BIG influences in how consumers perceive prices.

Already Giant/Stop & Shop in Maryland, DC and Virginia has jumped on the discount gasoline bandwagon, partnering with Shell Oil. They join an already crowded field that includes Winn-Dixie, Giant Eagle, Shop ‘n Save, Foodland, and others, with others such as Great A&P anticipated to offer some kind of a gasoline rebate based on purchases.

Gene Detroyer
Guest
10 years 11 months ago
The first time one spends $50 for a tank of gas, it is a shocker. When it goes down to $45 for a tank, it really isn’t a big deal. When gas prices went up, they went up from less than $2.00 per gallon to more than $3.50. For a tank of gas that could be more than $20. Two tanks a week, eight tanks a month and that is a new credit card charge of over $160. When the price goes down ten cents a gallon who notices and who really cares? That might give the consumer all of $16 per month. Maybe he can buy a ticket to a new 3-D movie? With all the other problems the consumers and the economy are having, so nicely checked off by our BrainTrust, a small change in the price of gasoline is meaningless. (It will be especially meaningless to the 19,000 drivers that have Toyota’s electric cars on order.) The price of gasoline is way down on the consumers list of concerns. Unfortunately, so is… Read more »
Ed Rosenbaum
Guest
10 years 11 months ago
Gas prices at the pump are the “red flag” to our brain stimulating us that something (usually bad) is about to happen. Right now we are waiting and watching to see what the BP oil spill in the Gulf will eventually do to the Seafood and Restaurant industries, and how pricing will be affected. We learned some different and better buying habits as a result of the economic and financial crisis we are still experiencing. I seriously doubt we, as consumers, are going to go back to free spending again. Not after the lessons we should have learned this time. The depression of the ’30s taught our parents and grandparents a different level of frugality that helped them recover and be successful. We did not learn those lessons until recently. We have to continue to remember as things ease for us and not get caught in the same buying habits again. A discussion topic a few weeks back dealt with a $500.00 pair of jeans. The general buying public hopefully has learned a lesson and… Read more »
Kai Clarke
Guest
10 years 11 months ago

Purchasing is an emotional reaction. However, if anyone truly believes that the price difference of just $.10-$.20 per gallon in our gas pricing will move the retail landscape, they are truly mistaken. This is a small factor, but we cannot forget the consumer staples like bread, milk, eggs, cheese, electricity, water, etc, that are all contributors to our daily purchasing decisions. When we consider all of these as a purchasing basket, how their prices move on a whole has a much greater impact than any one component.

Roger Saunders
Guest
10 years 11 months ago
Gene captures the view of the consumer perfectly. And, the consumer does react with their wallet when prices fluctuate–both positively and negatively in their spending habits at retail. BIGresearch has been listening to the consumer on a monthly basis since 2002 about this topic within the Consumer Intentions & Actions (CIA) Survey. We ask them: “How have fluctuating gas prices impacted your spending?” We also ask them: “Please tell us what price per gallon cause you to change your driving habits.” During that time, the 8,000+ consumer responses each month point to the fact that consumers do take action to get control of their world. During the highs and lows of gas prices, they have taken this type of action: 1. Drive Less — ranges 31% to 39% of Adults2. Dine out less often — ranges 28% to 38%3. Decreased vacation travel — ranges 28% to 36%4. Delay major purchases — ranges 28% to 37%5. Spend less on groceries — ranges 18% to 23% The point at which they change their driving habits can be… Read more »
Herb Sorensen
Guest
10 years 11 months ago

Retailers and their advisers make massive pricing mistakes by thinking lower prices are always attractive, always! It is simply not true, except maybe for commodities. And the clients I served for many years were mostly brands, some of which were lost in commodity pricing land, simply because of the overwhelming pressure from retailers to lower prices.

Run, don’t walk, to get a copy of “How to Stop Customers from Fixating on Price,” Harvard Business Review, May 2010.

Craig Sundstrom
Guest
10 years 11 months ago

The answer to the basic question is obvious: one adjusts rapidly to a price increase because you have to (you can’t spend money you don’t have anymore…the experience of the past few years notwithstanding); one adjusts to declines slowly because there are more options, and also because the cautious fear the decline may not last.

I’m not sure though about the rationale of equating (gas) prices with economic performance: lower prices may well make people “feel good,” but logically the price declines are due to lesser demand, which of course would mean a slowing economy, not a growing one.

Larry Allen
Guest
Larry Allen
10 years 11 months ago

Many great comments here and I would echo some of these same sentiments. The price of gasoline is like the “stock ticker” for the average, working-class consumer (and I consider myself one). It has the same effect on the buying psyche. The message is clear, everywhere you go are gas stations trumpeting the almost daily movement, up or down.

It is almost irrational when you think of the actual cost effect…a 25 cent rise is only $5-$10 a week for most drivers. Grocery price increases have a far greater impact, but those are almost invisible. You don’t see big lighted signs outside the supermarkets showing the daily increase in the cost of milk!

So, while the truth is that it should not have such a strong bearing on consumer spending, it actually has a tremendous psychological effect.

And heaven forbid there be a supply shortage…once those lines start to occur, just listen to talk radio or look at local news/media reports to get a real feel for what’s important.

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