The Evolving Link between Oil Prices and U.S. Consumer Spending

5 Nida Çakır Melek is a senior economist at the Federal Reserve Bank of Kansas City. Robert J. Vigfusson is an assistant director in the Division of International Finance at the Board of Governors of the Federal Reserve System. Colton Tousey, an assistant economist at the Federal Reserve Bank of Kansas City, helped prepare the charts. This article is on the bank’s website at www.KansasCityFed.org Oil prices have fluctuated widely since the 1970s. Starting around 2000, oil prices began a steady rise, reaching historic highs in the mid-2000s. Then, in the wake of the 2007–09 global financial crisis, oil prices plummeted, before rebounding sharply in the early stages of the subsequent economic recovery. This rebound in prices helped fuel investment in the U.S. oil sector and propelled the fracking revolution. As the fracking revolution took hold and U.S. oil production ramped up, prices again fell sharply in 2014. Although oil prices began to recover again in recent years, they took yet another sharp hit in the economic shutdown precipitated by the COVID-19 pandemic. Historically, consumers have tended to increase spending on nonoil goods and services when oil prices decline and cut back on such spending when oil prices rise. This response is due, in part, to the United States being a major oil importer and the demand for oil being relatively price-inelastic—that is, slow to adjust to price changes (see, for example, Hamilton 2009; Edelstein and Kilian 2009; Yellen 2011; Ramey 2016). However, this relationship may have changed more