Gasoline is nearing an average $5 per gallon across the U.S., but while consumers are feeling the pain, prices are not yet at a level that would tip the economy into a recession, economists said.

Where that breaking point price lies is unclear. Some suggest it would probably not be just gasoline alone that would send the economy into a tailspin. That said, economists say a recession is indeed possible if fuel prices rise to an even higher level and stay there for an extended period of time.

According to AAA, the national average for a gallon of unleaded gasoline was $4.97 Thursday, up about 65 cents in just a month.

Compounding the pinch at the pump is the fact that other costs are rising as well, with inflation this spring running at an 8.3% pace over last year. Surging natural gas prices are creating higher overall energy prices, while food and rents are also climbing.

“I think we’re in a particularly extreme situation right now,” said Harrison Fells, senior research scholar at Columbia University’s Center for Global Energy Policy. “I don’t think many economists would argue sustained $5 gas prices would have minimal effects. I think most of us would agree sustained prices that high with no other policy intervention would be a drag on the economy. Whether or not it’s sufficient to tip us into a recession is a bit of an unknown factor.”

Economists are watching gas prices closely because the pace of the increase has been rapid. Rising fuel prices are noticed by drivers, and the higher cost of gas can impact consumer sentiment and inflation expectations.

Economists note though that rising wages and a strong job market are working as insulation against the higher prices. Unlike 2008, when gasoline soared and the economy fell into a recession, consumers are in much better shape.

“While there’s clearly a shock, and there’s a strain on consumer budgets, the good news is there is support from the healthy labor market and the amount of excess savings that are still outstanding. In 2008, there was zero savings,” said Michelle Meyer, Mastercard’s chief economist, U.S.

Household balance sheets were weak in 2008, and consumers were heavily in debt. “There was minimal savings. … It was much harder to absorb price shocks,” Meyer said.

According to Mastercard SpendingPulse, which measures overall retail sales across all payment types, nominal spending at gasoline stations in recent months has increased at a trend pace of about 30%, compared with the same time in 2019.

Meyer points out that even though gas prices jumped in the last two months, the nominal spending growth remained steady. She said that suggests consumers have cut back on how much gasoline they are buying as they spent the same amount.

“There’s been some pullback in real consumption or usage. That means consumers are trying to make a decision, trying to figure out how to balance their spending priorities,” she said.

Another big difference between now and 2008 is that vehicles are more fuel efficient and there are more hybrid and electric vehicles on the road. There is also more flexibility in commuting with more people working remotely or in the office on a part-time basis.

“For the average person out there, it feels very different, depending on how exposed they are to gas prices,” Meyer said.

Mark Zandi, chief economist at Moody’s Analytics, said the economy is holding on, but there have been some signs of gasoline prices creating a drag. For instance, some automakers reported sharp sales declines in May, a month where gasoline prices rose quickly. The declines were particularly noticeable in large sports utility vehicle sales.

“That would suggest gas is playing a role. It felt demand side driven, not supply side driven. Of all the economic indicators out there, that’s the one that makes me most nervous about what’s going on,” he said.

Economists are watching consumer trends closely for behavioral changes. Lately, credit card use has also been rising, and consumers are taking on more debt. “It feels like lower and middle income households are starting to borrow,” Zandi said.

So far, Zandi does not see gasoline at a point where it is sapping the economy’s ability to grow, and he does not expect a recession this year.

“I don’t think we’re there yet. If we get to $5.50 or $6, that would be consistent with $150 for a barrel of oil. I think then, we’re done. We’re in for a recession,” he said. “It would be too much to bear. I think we could digest $120 if we don’t stay there too long.”

He said he expects oil could top out near current levels, and be below $100 per barrel by this time next year, relieving pressure on gasoline prices.

“The economy is definitely on thin ice here. We need a little luck on oil prices,” he said. Zandi said he sees a one-in-three chance of a recession over the next 12 months, and almost even odds for a recession in the next 24 months.

Skyrocketing gasoline prices come as many Americans are choosing to spend on things like travel and entertainment. That determination to return to normal activities could be keeping gasoline demand higher than it might otherwise have been as prices rose.

“Savings were pretty good coming out of the pandemic. I think people were in a better position to weather those higher gas prices right now. Together with this pent up demand for travel, it’s shielding us from this $5 gas price,” Fells said.

Also, gasoline prices, while at a record, are not at the levels reached in 2008, when measured in wage adjusted terms.

Sarah House, senior economist at Wells Fargo, said she estimates gasoline will average $4.84 per gallon for the month of June. To make that equal to 2008 levels, based on a wage adjusted basis, prices would have to reach $6.41 per gallon, House said.

“It’s going to take more than just higher gasoline prices to knock the economy into a recession,” said House. “We’re slowing but it’s still a remarkable number of jobs we’re putting up.”

The one caveat she noted was that consumers are contending with some of the fastest growing inflation in decades, and gasoline just adds to that burden.

“It’s one more straw on the camel’s back,” she said, nothing that makes it easier for an unexpected shock to knock the economy off course. Because of uncertainty about how high energy prices can go, House does not believe inflation has peaked, unlike some economists.

How high can gas prices go?

Oil prices reached a high of about $130 per barrel in March after Russia invaded Ukraine but then fell off again. Crude has been on the rise again and could go higher on further European sanctions on Russian oil and as China’s economy reopens after recent Covid shutdowns. West Texas Intermediate crude futures were just under $122 per barrel on Thursday.

Gasoline prices move higher with oil, but there is also less supply than normal in part because of a reduction in global refining. In the U.S. alone, refining capacity is down 1 million barrels a day from pre-pandemic levels due to outages and shutdowns.

JPMorgan analysts expect gasoline could top out at a price of $6.20 per gallon by August, but other analysts expect the peak price to stay closer to $5.25 per gallon because drivers will likely cut back.

Patrick DeHaan, head of petroleum analysis at Gas Buddy, said driving demand was down from last year over the Memorial Day weekend, the start of summer driving season.

The Energy Information Administration reported drivers used 8.98 million barrels a day of gasoline in the week heading into the holiday weekend. Last year, that level was 9.2 million barrels a day. In 2019 drivers used 9.4 million barrels a day in the comparable period. 

DeHaan said he expects the run-up in gasoline prices is nearly at a peak, but all bets are off if there’s any disruption in supply.

“If we get a hurricane, if there’s a refinery kink, we’re going up to $5.50 or maybe $6. Normally a peak is a lot more predictive than it is this year,” he said.