Low-income Americans cut their gas consumption sharply in the month following the Iran war, but rising prices are still forcing them to spend more, exacerbating economic disparities in the economy, new research released Wednesday showed.
Meanwhile, higher-income households increased their spending on gas while barely reducing their consumption, according to a report from the Federal Reserve Bank of New York. Middle-income families fell in the middle.
The report found that the gaps between how each group responded were larger than in 2022, when a similar gas price shock occurred after the Russian invasion of Ukraine. Higher-income households reduced their gas consumption more four years ago than in March, while poorer households are likely to benefit more from government stimulus programs in 2022. Wealthier households have seen significant increases in the value of their stocks and real estate holdings since then as well.
The numbers show that rising gas prices have exacerbated what many economists call the “K-shaped economy.” The K-shape sign indicates that higher-income Americans continue to do well while lower-income households lag behind. The mixed results could help explain the generally dismal attitude most Americans have toward the economy, even as key numbers, such as the unemployment rate and economic growth, remain mostly flat.
“We found that households have very different experiences with gasoline spending,” researchers at the Federal Reserve Bank of New York wrote. “With the sharp increases in gasoline prices in March, a K-shaped pattern emerged in gasoline consumption – showing faster growth in consumption by higher-income households than by lower-income households.”
The Iran war began on February 28, and by the end of March gas prices had risen by about 25%, according to government consumer price data. Overall gas consumption, according to the Federal Reserve Bank of New York, fell by 3% that month. As of Tuesday, gas prices had jumped by 50% since the war began.
The report found that poor households, defined as those making less than $40,000, reduced their gas consumption by 7%, but still spent 12% more on gas in March. High-income households, defined as those earning $125,000 annually or more, increased their gas spending by 19% in March, while reducing their overall gas consumption by just 1%. The report did not specify numbers for middle-income people.
The numbers suggest that lower-income Americans have cut back on driving, perhaps by carpooling, taking public transportation, or combining errands into fewer trips, while wealthier Americans have had to make few, if any, changes.
A New York Fed report estimates that total spending at gas stations jumped 15% in March compared to the previous month. If this additional gas spending continues, it will pull money away from other areas, reducing overall inflation-adjusted spending and slowing the economy. So far, there are only limited signs of what is happening. Americans are spending less on gas than they did in previous decades as cars have become more efficient.
The government said last week that consumer spending, adjusted for price changes, rose 0.2% in March, slightly lower than February’s gain of 0.3%.
However, there is evidence that for many low-income people, rising gas prices are a major drag on their finances. A separate report from the Bank of America Institute, released last week, found that among the poorest third of households, a tenth of households now spend 10% of their income on gas. This number is much higher than the average for high-income households, which spend only 2.7% of their income on gas.
Data from the institute, which compiles reports from its clients’ anonymous accounts, also showed that higher gas prices have pulled some spending away from discretionary items, defined as that outside of groceries, gas and utilities. Annual growth in discretionary spending for poor households slowed in March compared with February, while it rose for middle- and upper-income households.
Source: AFP
