By Howard Schneider

WASHINGTON (Reuters] – A gusher of cash that the U.S. government poured into bank accounts of family members during the coronavirus outbreak may help to limit economic losses from Russia’s invasion.

Analysis of sky-high oil prices, uncertainty and other possible implications has led to a common theme: U.S. consumer may feel cheated at the pump but they will be able to continue spending large amounts on other goods and services due to the $5 trillion in savings that emergency federal programs have accumulated over the last two year.

They note that the war in Ukraine has been a surprise, however, one which the United States might have not intendedly insured against.

JPMorgan’s economist Daniel Silver wrote that “Household savings could be used to help consumers retain their spending habits in the face price increases.” He said that each $10 increase in oil prices would result in an extra $23 billion in annual costs for consumers.

According to the report, households have accumulated approximately $2.6 trillion worth of excess saving in recent years as compared to the pre-pandemic trends. That could cover an even sustained 50% rise in oil prices over many years.

U.S. consumer price data will be available later this week. It is expected that the annual rate of price growth increased to 7.9% in February from 7.5% in January. However, this won’t show the bulk of the commodity price rises in the past two weeks after Russia invaded neighboring countries.

How long this war continues, how deep commodity markets are affected and how aggressively the Federal Reserve reacts to an inflationary trend that is accelerating beyond oil prices will determine the full impact.

To counter the February 24th invasion of Russia, the United States, along with its Western allies, imposed punishing sanctions on Russia. Russia was the biggest exporter of oil and products in the world. This contributed to the rise in oil prices. After a brief spike of $92 per barrel before conflict, the West Texas Intermediate (WTI ) crude price briefly hit $130/barrel. It ended around $110 Wednesday.

Although the average U.S. gasoline price of regular unleaded has reached a new record at $4.25 per gallon, it is still about 1 more than inflation-adjusted.

This indicates that inflation will likely continue to rise, but it is less clear what this means for both the Fed as it discusses the speed at which to increase interest rates and the U.S. as it recovers from the pandemic.

Prior oil shocks such as that in 1970s were associated with higher persistent inflation, which prompted the U.S. central banking to respond with rate hikes. Some others, like the short spike in inflation during the Gulf War of the 1990s, occurred alongside Fed rate increases because it was anticipated that underlying inflation would ease.

SIGNS of Substitution, Not PULLBACK

It appears that the U.S. may still have some breathing room. The year began with strong growth. Even if oil prices drop, it is likely that the result for the year will be stable. This does not mean weakening or rising prices.

Bank of America (NYSE) economists stated in a note that the U.S. had become less vulnerable to energy shocks. They also noted a gradual decline in income spending on energy. Omicron case cases are over, so the reopening the service sector is now possible. This rebound can be funded by excess savings from the past two years.

GRAPHIC: Energy’s share of U.S. consumer spending- https://graphics.reuters.com/UKRAINE-CRISIS/USA-CONSUMPTION/jnvwebrqwvw/chart.png

An understanding of past oil shocks is possible from research. Even with rising gas prices, drivers and fuel consumption tend to stay steady. This is partly due to necessity, such as driving daily, on the job or for family duties – but also because they have a choice.

In this way, household budgets can adapt. In 2008, a study on high-gas prices revealed that shoppers were more inclined to shop at discount grocery stores or substitute for cheaper brands.

A possible indicator of this move is the stock of a discount retailer chain Dollar General Corp The stock exchange (NYSE:) has risen 10% over the period of the Ukraine War, surpassing the wider market.

Nik Modi is a RBC Capital Markets tobacco and household product analyst. He said that there was evidence of smokers switching to lower-priced cigarettes in February, which he believes will continue with rising gas prices. From the beginning of the year, pump prices rose by nearly 30 cents per gallon. This was before Russia invaded. The pump prices have increased another 70 cents in the past year.

However, high-frequency data on travel and restaurants shows that consumers are not retreating.

PANDEMIC BEHAVIOR MODIFICATIONS

Officials at corporates that might be affected by higher prices for gasoline said they believe consumer spending will rebound.

A few studies show that rising gas prices lead families to make smaller purchases or delay them. But David Denton, chief financial officer for Lowe’s home improvement chain (NYSE:) Cos Inc’s said Wednesday at UBS Global Consumer and Retail conference.

Denton explained that gas prices in the past have caused a drop in demand for this sector. However, Denton indicated that consumers may be more comfortable working from their homes than those who used to commute.

Others pandemics could also occur. Public transit is still a low-use option, however it may be possible to make public transportation more accessible for ex-riders as COVID-19 rates decline. The credit card balances have fallen, which gives consumers more financial options and allows them to make purchases now that their social lives are back on track.

Additionally, officials and economists have pointed out that rising oil prices have potential upside for the United States. However, the impact to consumers will be offset by higher employment and increased investment in energy production.

Michael Pearce (a senior U.S. economist at Capital Economics) stated that oil prices must rise further to threaten consumer recovery. Any impact on the economy should be offset by higher investments in shale.

Pearce stated that the Fed may also have unintended positive effects. Rising gas prices could reduce consumer demand for certain goods and services. This would help to ease inflation.

In part, rate hikes work by reducing consumption. The oil shock could help the Fed accomplish that task. It is widely believed the Fed will raise borrowing costs next week at its policy meeting.

Pearce stated that this meant domestic demand was weaker and should lead to less upward pressure on wages, Pearce added.