US fuel price shock: Lower-income households cut driving as gasoline costs surge; study flags widening inequality

America’s widening income divide has become more visible after the sharp rise in fuel prices linked to the Iran war, with lower-income households forced to cut back on driving even as their spending on gasoline increased, according to a new Federal Reserve Bank of New York study cited by AP.The report showed that while wealthier Americans largely absorbed the higher fuel costs with minimal lifestyle changes, poorer households reduced gasoline consumption sharply to cope with rising prices.“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 report said.The Iran war, which began on February 28, triggered a steep rise in crude oil and fuel prices after disruptions in the Strait of Hormuz affected global energy supplies. US gasoline prices had climbed around 25 per cent by the end of March and are now roughly 50 per cent higher than pre-war levels.According to the study, households earning less than $40,000 annually reduced gasoline consumption by 7 per cent in March, but still ended up spending 12 per cent more on fuel.Higher-income households earning above $125,000 increased fuel spending by 19 per cent while trimming gasoline consumption by only 1 per cent.The report suggested lower-income Americans responded by reducing trips, using public transportation, carpooling or combining errands, while wealthier households faced little disruption.Researchers said the disparity was sharper than during the fuel-price shock that followed Russia’s invasion of Ukraine in 2022.The findings add to concerns over what economists describe as a “K-shaped economy”, where upper-income households continue to gain wealth while lower-income groups struggle with inflation and rising living costs.The New York Fed estimated that overall spending at gas stations rose 15 per cent in March compared with the previous month, potentially squeezing discretionary spending and slowing broader economic activity.A separate report by the Bank of America Institute found that among the poorest third of US households, one in ten now spends nearly 10 per cent of income on gasoline. Higher-income households spend around 2.7 per cent of their income on fuel.The institute also noted that discretionary spending growth among lower-income households slowed in March, while middle- and higher-income consumers continued to increase spending.