Expected Gas Price Rises Curb Household Spending, Except When Rates Hit Zero

When households expect gasoline prices to rise, they pull back on big purchases. A new study finds that this reflex fades when interest rates are stuck at zero. The paper, published in Energy Economics, is by Mohammad Iqbal Ahmed, Associate Professor in the Department of Finance and Economics at McCoy College of Business, Texas State University; Adeel Faheem of the University of Wisconsin-Parkside; and Quazi Fidia Farah, Assistant Professor in the Department of Finance and Economics at McCoy College.

The zero lower bound

Central banks fight weak spending by cutting interest rates. The zero lower bound, or ZLB, is the point where the policy rate reaches zero and cannot go meaningfully lower. The United States sat at the ZLB from late 2008 to late 2015 and again from 2020 to early 2022. Economic theory says the economy behaves differently there. Shocks that would normally be offset by rate cuts are not, and some effects can weaken or even reverse. That makes the ZLB a natural test of whether gasoline price expectations matter in the same way under all conditions.

The study

The researchers use household-level responses from the University of Michigan Survey of Consumers. The survey asks people whether now is a good time to buy major household items, and separately asks what they expect gasoline prices to do. The authors estimate ordered probit models, a statistical method suited to survey answers that come in ranked categories such as good, uncertain, or bad. They run the models separately for normal periods and for ZLB periods.

What the researchers found

In normal times, households that expect higher gasoline prices are significantly less ready to spend on durable goods. At the ZLB, the estimated effect is smaller and not statistically different from zero.

The authors examine four channels that could explain why gasoline expectations weigh on spending: less discretionary income after fuel costs, precautionary saving, general uncertainty, and the higher running cost of owning fuel-using goods. Each channel shows up in normal periods. None gains traction at the ZLB.

What it means for policymakers and businesses

For policymakers, the study says the interest-rate environment shapes how energy shocks hit demand. A jump in expected gasoline prices during ordinary times is a headwind for consumer spending that monetary policy may need to weigh. During a ZLB episode, the same shock appears to pass through to spending decisions much more weakly, so forecasts built on normal-period relationships may overstate the damage.

For retailers, automakers, and other sellers of big-ticket goods, gasoline expectations are a useful early signal of demand, but only in ordinary rate environments. When rates are pinned at zero, other forces dominate.

This summary is based on the paper’s abstract. The full article reports the data, methods, and detailed results.

What it means for managers

• In ordinary times, gasoline price expectations are a real headwind for durable goods demand. Sellers of big-ticket items should watch them.
• At the zero lower bound the effect is small and not statistically significant. Forecasts built on normal-period relationships may overstate the damage from an energy shock during such episodes.
• The usual channels, less discretionary income, precautionary saving, uncertainty, and higher running costs, only bite in normal interest-rate environments.

Ahmed, M. I., Faheem, A., & Farah, Q. F. (2026). Do gasoline price expectations affect household readiness to spend at the ZLB? Evidence from Michigan survey data. Energy Economics, 157, 109272. 10.1016/j.eneco.2026.109272