Coming into the year, one of the major economic themes was the expected strength of the U.S. consumer. A key reason for that optimism was the wave of additional tax refunds created by provisions from last year’s tax legislation, including changes such as no tax on tips, no tax on overtime, and adjustments to the SALT deduction. These measures were expected to deliver a meaningful boost to household cash flow. So far, that boost has materialized. Tax refunds are running about $24.7 billion higher compared to this time last year, providing a significant inflow of funds to American households. However, rising oil prices are beginning to offset part of that benefit. Gasoline costs have increased by roughly 57 cents per gallon, and because the United States consumes about 380 million gallons of gasoline per day, that price increase translates to approximately $218 million in additional daily spending on fuel. Over time, that adds up quickly. Estimates suggest that around $5–6.5 billion of consumer purchasing power has already been absorbed by higher gasoline costs. While that has not eliminated the entire tax refund boost, it has clearly reduced the amount of money consumers have available for discretionary spending. There are early signs of this shift in behavior. The U.S. savings rate has moved higher, indicating that consumers may be holding onto more of their refund rather than spending it broadly across the economy. Instead, a larger portion of that money is being redirected toward energy costs. This dynamic isn’t inherently negative, but if energy prices remain elevated for an extended period, it could limit the broader economic stimulus that tax refunds were expected to provide.

Consumer spending remains one of the most important drivers of economic growth and market performance, which makes rising oil prices especially significant. To better understand the current environment, it’s helpful to look at how oil prices behaved during previous geopolitical shocks, particularly the surge that followed the Russian invasion of Ukraine. At that time, oil prices rose sharply as the conflict escalated. Brent Crude climbed from around $65 per barrel in early December 2021 to roughly $139 per barrel as the war unfolded in early 2022. Recent events show a similar pattern. Tensions surrounding the conflict involving Iran pushed oil prices from about $60 per barrel to nearly $120, reaching a peak around early March before retreating as tanker traffic resumed through the Strait of Hormuz. This waterway is one of the most critical chokepoints in global energy supply, with a significant share of the world’s oil passing through it. Because of that, any disruption to traffic there introduces considerable supply risk. The good news is that oil prices have recently pulled back, suggesting that markets may be pricing in a better-than-feared outcome. If the pattern continues to resemble the 2022 experience, there’s a possibility that peak prices for this geopolitical event may already be behind us. Still, uncertainty remains high. Oil volatility continues to reflect ongoing concerns about the duration and intensity of the conflict and its potential impact on global supply.

While market attention has largely been focused on geopolitical developments and energy prices, another important factor is quietly approaching: the Federal Reserve’s upcoming policy meeting. The Federal Reserve is widely expected to hold rates steady for now. However, expectations for interest rate cuts have shifted dramatically in recent months. At the start of the year, markets were pricing in roughly three rate cuts for 2026. That expectation has now dropped to fewer than one cut for the year, a significant change in outlook. A major reason for this shift is renewed concern about inflation, particularly due to higher energy prices. Oil price spikes often create short-term inflation pressure, but historically they tend to be one-off events rather than drivers of sustained inflation. In many cases, high oil prices eventually slow economic activity, which helps ease inflation pressures over time. Some early signs of that slowdown are beginning to appear. Recent revisions show that U.S. real GDP growth slowed from 1.4% in the fourth quarter to 0.7%, indicating a modest deceleration in economic momentum. Ironically, if oil prices eventually decline, as they often do after geopolitical shocks, the resulting drop in inflation pressure could reopen the door for additional rate cuts from the Fed. For now, savers may benefit from higher interest rates lasting longer than expected. But if oil prices retreat and economic growth slows further, the outlook could shift toward two to three rate cuts, which would be more favorable for borrowers.

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