The rising cost of gas is putting a strain on American households, particularly those with lower incomes. This issue has become a pressing concern as households are forced to allocate a larger portion of their income towards fuel expenses. According to a report by the Bank of America Institute, lower-income households are feeling the pinch, with gas consumption rising to 4.2% of their income, up from 3.9% a year ago. This is in contrast to the average household across income groups, which spent around 3.1% of their income on gas in March.
One of the key takeaways from this report is the disparity between income groups. Lower-income households, with less disposable income, are more vulnerable to rising gas prices. As David Tinsley, senior economist at the Bank of America Institute, explains, "Lower-income households spend more as a share of their income on gas just because they have less room for discretionary spending than middle- and higher-income households."
The war in Iran has exacerbated this issue, causing oil prices to surge above $100 a barrel, which in turn has led to a 40% increase in gas prices. This is not an isolated incident; similar gas shocks were experienced during the 2008 financial crisis and the COVID-19 pandemic. However, Tinsley notes that while the current rise in gas prices is painful, it is not as severe as those previous incidents.
Despite some relief in the form of higher wages, particularly for higher-income households, many consumers are turning to credit and buy now, pay later schemes to manage their finances. Tinsley highlights that lower- and middle-income households are utilizing these options more frequently, but he cautions that these solutions only provide temporary relief.
"The downside of that is, at the end of the day, buy now, pay later only smooths your spending over a couple of months, so it's not going to make that big a difference to the overall story," Tinsley said.
One positive aspect, according to Tinsley, is that households across income levels have increased their savings, largely due to larger tax refunds. This provides a buffer for households to weather the gas shock in the short term.
In conclusion, the rising cost of gas is a significant issue for American households, especially those with lower incomes. While there are temporary solutions like credit and buy now, pay later, the long-term impact of these rising costs on household finances is a concern. As Tinsley notes, "The rising gasoline prices we've seen really squeeze lower-income households the most." It remains to be seen how these households will navigate this financial strain in the coming months.
