Lower-income Americans sharply reduced their gas consumption in the month following the Iran war, yet spiking prices still forced them to spend more at the pump, worsening the economy’s economic disparities, new research released Wednesday showed.
Higher-income households, meanwhile, ratcheted up their spending on gas while barely reducing their consumption, according to a report from the Federal Reserve Bank of New York. Middle-income households fell in-between.
The gaps between how each group reacted were larger than in 2022. when a similar gas-price shock occurred after the Russian invasion of Ukraine, the report found. Higher-income households cut back more on their gas consumption four years ago than in March, while poorer households likely benefited more from government stimulus programs in 2022. Wealthier households have seen significant increases in the value of their stock and real estate holdings since then as well.
The figures suggest the gas-price surge has worsened what many economists call the “K-shaped economy.” The K-shape label refers to upper-income Americans continuing to do well while lower-income households fall behind. The disparate outcomes can help explain the generally gloomy attitude most Americans have toward the economy even as headline figures, such as the unemployment rate and economic growth, remain mostly solid.
“We find that households had very different experiences with gasoline spending,” researchers at the New York Fed wrote. “With the sharp increases in gasoline prices in March, a K-shaped pattern in gasoline consumption emerged—showing faster consumption growth for high income households relative to low-income households.”
The Iran war began Feb. 28. and by the end of March gas prices had risen about 25%, according to government consumer price data. Overall gas consumption, according to the New York Fed, fell 3% that month. As of Tuesday, gas prices have leapt 50% since the war began.
Poorer households, defined as those earning less than $40.000. cut their gas consumption by 7%, the report found, but still spent 12% more on gas in March. Higher-income households, defined as those earning $125.000 a year or above, lifted their spending on gas 19% in March, while reducing their overall consumption of gas just 1%. The report didn’t specify the middle-income figures.
The figures suggest lower-income Americans have cut back on driving, perhaps by carpooling, taking public transportation, or combining errands into fewer trips, while richer Americans have had to make few, if any, changes.
The New York Fed report estimates that total spending at gas stations jumped 15% in March from the previous month. If sustained, that extra spending on gas will siphon money away from other areas, reducing overall inflation-adjusted spending and slowing the economy. So far, there are only limited signs that is happening. Americans do spend less on gas than in previous decades as cars have become more efficient.
Consumer spending, adjusted for price changes, ticked up 0.2% in March, slightly below February’s 0.3% gain, the government said last week.
Still, there is evidence that for many lower-income people, the spike in gas prices is a big drag on their finances. A separate report from the Bank of America Institute, released last week, found that among the poorest one-third of households, one-tenth now spend 10% of their incomes on gas. The figure is far above the average for higher-income households, who spend just 2.7% of their incomes on gas.
Data from the Institute, which compiles reports from the anonymous accounts of its customers, also showed that more expensive gas has pulled some spending away from discretionary items, defined as those outside groceries, gas, and utilities. The annual growth in poorer households’ discretionary spending slowed in March from February, while it rose for middle- and upper-income households.
