The spike in gas prices is worsening the K-shaped economy

5 hours ago 4

Person pumping gas into their vehicle at a gas station

New research shows that there's a K-shape emerging in gas spending.
Higher earners are fine with buying gas at higher prices, but lower earners are pulling back.
People can try to control their spending by consolidating their trips and checking reward programs.

Gas prices aren't just causing headaches at the pump — they're also worsening a growing economic divide.

A new report from the Federal Reserve Bank of New York finds that spending on gas mirrors — and deepens — the chasm between America's higher and lower earners. While everyone is spending more money, those at the bottom of the income distribution are cutting their real consumption at a much deeper rate than higher earners, suggesting a decline in driving or getting creative with how they get around.

All three household income groups — low, middle, and high — saw a massive spike in their nominal gas spending, with high-income households seeing the largest climb from this past February.

Adjusting for those high prices, however, shows that the actual amount of gas being bought has plummeted for low earners, while those at the top are eating the price hikes and seeing a much smaller decline in how much fuel they're purchasing. "Lower-income households increased spending by much less and decreased real consumption by much more, potentially by carpooling or substituting to public transit where available," researchers Rajashri Chakrabarti, Thu Pham, Beck Pierce, and Maxim Pinkovskiy wrote.

It's part of what's called the K-shaped economy. Americans' economic fortunes at the top and bottom of the income spectrum began diverging again in 2023, following a short-lived period of pandemic-era stimulus that bolstered wages and job opportunities for lower earners. In a K-shaped economy, higher earners' fortunes are better off, or at least stable, and lower earners see theirs weaken.

Today's K is in a holding pattern, undergirded by inequities in financial assets and inflation. Higher earners hold a greater share of financial assets, such as stocks, while lower earners are more exposed to and affected by inflation.

The new analysis covers spending patterns through March, when gas prices climbed to just above $4. After a short-lived cooldown in April, consumers are still not getting price relief at gas stations. AAA data showed the national average for regular, unleaded gas was about $4.54 as of Wednesday, up from $4.12 a month ago and $2.98 at the end of February around the start of the Iran war.

While consumers can't change advertised prices, there are several ways they can try to control their gas spending.

David Bennett, senior automotive manager at AAA, said to make sure your vehicle is running properly by checking tire pressure and looking for any dashboard warning lights. People should also try combining trips they need to make, take out items that are weighing down their car, and consider fuel rewards programs.

"Take care of your vehicle, and it'll take care of you," Bennett said. "Take your time when you're on the roads, plan accordingly, plan ahead."

Even so, higher gas prices are still unavoidable for many consumers. And for those lower-income Americans, it might mean pulling back even more on non-essential driving — including vacations or even shorter leisure trips.