This past January brought the lowest gasoline prices that the country had seen in nearly six years. The national average gasoline price was $2.27 per gallon that month and many parts of the country saw pump prices below two dollars. Gasoline is clearly more affordable than it had been, but does the price drop affect what consumers think they can afford?
Businesses and policymakers might wonder whether people get comfortable with a given price range. In other words, would consumers think they can afford more once they get used to a price rise or, conversely, do they feel they can afford less when the price drops?
Two of the questions asked in the University of Michigan Energy Survey probe consumers’ “thresholds of pain” when it comes to energy prices. One asks how high gasoline prices would have to get before consumers felt it would cause them to have to make adjustments in their travel decisions. A similar question examines the limits of affordability for home energy, such as monthly electric and heating bills. This chart shows how the answers for gasoline price since the U-M Energy Survey started in October 2013 compared to actual national average pump prices over a similar time frame.
The upper (red) curve shows the average responses to our question about how much gasoline would have to cost before consumers would find it unaffordable in the sense of greatly crimping their household budgets. This threshold averaged $5.61 (±0.08) per gallon over the six quarterly samples of October 2013 to January 2015. Although there is a hint of decline, it was not statistically significant even as pump prices plummeted in the months leading up to this past January. So even as consumers enjoy lower costs, their views of the price at which gasoline would become unaffordable have not really changed.
What has changed is the difference between the most that consumers feel they can afford—that is, their threshold of serious pain at the pump—and the price they were paying when we conducted the survey. The gap between those two prices provides a measure of how consumers themselves perceive the affordability of gasoline.
Our full report on this issue examines the responses on this question in more depth. It also compares what consumers say about the price of gasoline to their views on home energy bills, which have not seen the price fluctuations seen in motor fuel markets over the past several years. The report can be downloaded via the button at the top of this post.