Oil price relief won't offset tariff impact, economists say
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Energy prices are plunging, a boost for consumers and businesses alike — and a key White House talking point, too.
Why it matters: Lower oil and gasoline prices could offset some of the consumer pain if prices on a slew of other goods go up as a result of the trade wars.
- But it likely won't be enough to entirely shield the economy from the tariff shock.
By the numbers: As of Wednesday morning, it cost roughly $62 for a barrel of crude oil — well below the most recent peak of $80 in early January. Since April, crude prices have plunged by more than $10.
- That sharp decline in prices reflects expectations for weaker demand as global growth slows. Oil cartel members (and non-members) have also agreed to ramp up production.
- That has helped push down pump prices for consumers. A White House release showed the lowest average gasoline prices for a Memorial Day weekend since 2021, confirmed by AAA.
Yes, but: While those low prices are a go-to political bragging point, it might not be as economically significant. In a recent note, Goldman Sachs economists say that lower oil prices "won't offset much" of the inflationary or growth impact from tariffs.
- "While lower oil prices will boost real disposable income and real consumer spending, they will also weigh on energy capital expenditures from lower oil prices," Jessica Rindels, an economist at Goldman Sachs, wrote in a recent note.
- Rystad Energy estimates that oil majors will "likely need to reduce both investment and shareholder payouts" as a result of "recent double-digit dips in oil prices not reversing," according to a note from the energy research firm.
- Goldman expects the drag from energy firms will cancel out much of the benefits from higher consumer spending. The net effect will be a roughly 0.1 percentage point GDP boost over 2025.
State of play: Goldman says the decline in energy prices has already pulled down headline inflation — as measured by the Personal Consumption Expenditures Price Index — by roughly 0.2 percentage points as of March.
- The energy price relief would spill over into non-energy categories and help drag the core PCE measure down by as much as 0.1 percentage point through the end of the year if oil prices remain at current levels.
- "But this drag is much smaller than the boost from tariffs, and we therefore expect year-over-year headline PCE inflation to rise from 2.3% currently to 3.3% in December 2025 and 2.7% in December 2026," Rindels wrote.
The intrigue: Biden-era inflation was made much worse by Russia's invasion of Ukraine, which led to a surge in energy and gasoline prices.
- That also weighed on consumer sentiment, with Americans constantly confronted with reminders of higher prices.
- Goldman noted that "tariff anxieties have recently driven a large surge in consumer inflation expectations despite the modest offsetting downward pressure from the decline in gasoline prices so far."
