A new report from the Federal Reserve Bank of New York reveals that the recent surge in gas prices, driven by the Iran war and the closure of the Strait of Hormuz—a critical passage for about 20% of the world's oil supply—has disproportionately impacted low-income households in the United States [1]. In March, energy prices reached a four-year high, with national gas prices surging past $4.50 per gallon as tensions in Iran pressured drivers [1].
The New York Fed's analysis, utilizing data from Numerator, found that nominal gasoline spending rose over 15% in March, shifting from 10% below its 2023 level to 5.5% above that mark [1]. This increase was attributed to higher gas prices, as real gasoline consumption declined by 3%, while the Advance Monthly Retail Trade Survey reported a 14.5% rise in spending at gas stations during the same period [1].
The report highlights a K-shaped pattern in gasoline consumption across income groups. High-income households increased their nominal spending on gasoline the most, with a 19% rise, while their real consumption declined only 1% compared to pre-war levels [1]. In contrast, low-income households saw a 12% increase in nominal spending but cut their real gas consumption by 7%, indicating that higher prices forced them to reduce usage more significantly [1]. Middle-income households experienced moderate increases in nominal spending and decreases in real consumption, reinforcing the K-shaped trend [1].
The New York Fed economists noted that this K-shaped pattern has "opened up much more than before" compared to the energy price shock following Russia's invasion of Ukraine in 2022 [1]. They explained, "Higher-income households have reduced real gas consumption only modestly and increased gasoline spending considerably compared with 2023. In contrast, lower-income households have pulled back on their gasoline spending the most among income groups" [1].
The surge in gas prices is also affecting other sectors, with rising costs reportedly crushing restaurant sales as $4 per gallon becomes a tipping point for consumers [1].
CONCLUSION
The Federal Reserve Bank of New York's study underscores that the recent spike in gas prices, fueled by geopolitical tensions, is hitting low-income households the hardest, forcing them to cut back on consumption more than higher-income groups. This K-shaped impact is more pronounced than during previous energy shocks, signaling significant economic strain on vulnerable consumers and broader market repercussions.