Written by J. Walker Smith, Executive Chairman, Kantar Futures
For many companies, the big question of the moment is what cheaper gas means for consumer spending. Five elements frame the answer:
- How much additional money will consumers have?
- What sort of spending power does this amount provide?
- How willing are consumers to spend?
- What will consumers buy more of?
- What does this mean for my category or brand?
Bottom line: for most categories, the near-term impact will be positive, yet modest. Even so, the upside potential is enough to warrant marketing support to ensure it is realized.
How much additional money will consumers have?
The savings from cheaper gas depend largely on how far prices fall, because gasoline demand itself is fairly inelastic. The typical household purchases about 1,200 gallons annually.1 Year to date, the AAA’s Fuel Gauge Report finds prices nationally across all grades of fuel about $1.00 less than a year ago, with some days as high as $1.20.2 Assuming prices stay low and accounting for the fact that year-ago differences will be much smaller in the second half of 2015, back-of-the-envelope math yields a little under $1,000 this year in after-tax money saved.
What sort of spending power does this amount provide?
In aggregate, the savings from cheap gas are a huge number. There are many estimates, but with over 117 million U.S. households, $1,000 per household roughly equals $117 billion in savings. One estimate is $1.4 billion saved for every penny less in gas prices sustained for a full 12 months,3 which yields approximately the same figure for aggregate savings as $1,000 per household when applied with similar assumptions about price differentials between this year and last year.
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