After a stretch of better-than-expected economic data in August, Fed Chair Jerome Powell warned that a resilient US consumer could prompt the central bank to raise interest rates again.
But less than a month later, the Fed may have a new engine to help slow consumer spending and the US economy in its fight against inflation: gasoline.
Gas prices rose steadily in August, pushing up costs for both consumers and producers of goods. This, economists say, could be good for the Fed even if it means an uptick in headline inflation in the immediate term.
"Oil prices have rallied, and for policymakers, this could be a blessing in disguise," Morgan Stanley's Ellen Zentner wrote in a note on Wednesday. "We find that an increase in energy prices from negative supply shocks has only a small pass-through to core CPI while weighing on spending."
The Fed is focused on core inflation, which excludes the volatile food and energy categories. In August, core consumer prices rose 4.3% over last year — a slowdown from the 4.7% annual increase seen in July.
While there are concerns that rising energy prices could spark price increases across a number of other goods and services, and therefore send core inflation higher, the risk may not be as significant as initially thought, according to Morgan Stanley.
The firm's economics team points out that production cuts in Saudi Arabia and Russia led WTI crude oil's price increase from $68 per barrel in June to $90 on Thursday. When the increase in oil prices comes from a supply shock, the impact on items included in core inflation calculations isn't nearly as severe, per Morgan Stanley. The firm sees a peak of a 0.05% impact on core CPI from rising energy costs before it falls in the next month.
"Higher energy prices must be sustained for some time to have a greater, more durable effect on core prices," Zentner and the Morgan Stanley economics team wrote. "The Fed will look through this shock."
Gas prices also drove higher-than-expected growth in August retail sales, which popped 0.6% from the month prior, above economists' expectations for 0.1%. Increases driven by gas usually lead to weaker goods spending in the long run if gas prices remain elevated, Goldman Sachs managing director Kate McShane told Yahoo Finance.
It will take several months before the impact on the consumer will be fully felt though, according to EY chief economist Greg Daco.
In a vacuum, Daco said the gas price increase isn't a "game changer" for the fight against inflation. But, he pointed out, it's another hit to the consumer as the case for a slowdown builds. The student loan moratorium ending on Oct.1 is expected to pressure the wallets of borrowers, while a looming United Auto Workers strike could halt vehicle production, hurting the labor market and sending car prices higher.
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"Amid clearer signs that the labor market is losing momentum, rising gasoline prices putting pressure on real incomes again, and the additional drag from the resumption of student loan repayments, it is hard to see consumers spending as freely over the rest of the year," Oxford Economics lead US economist Michael Pearce wrote in a note on Thursday. "We expect a sharp slowdown in consumption growth, which will be the decisive factor tipping the economy into a mild recession over the coming quarters."
Josh Schafer is a reporter for Yahoo Finance.
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