K-Shaped Economy: Lower-Income Households Struggle with Rising Gas Prices
By John Nada·May 6, 2026·6 min read
A recent study reveals rising gas prices are disproportionately affecting lower-income households, highlighting a K-shaped economic recovery.
Rising gas prices are hitting lower-income households significantly harder than their wealthier counterparts, according to a recent study by the Federal Reserve of New York. During the March energy price spike, households earning less than $40,000 a year raised their gas spending by only 12%, a result of cutting their consumption by 7%. In contrast, high-income households, defined as those earning more than $125,000 annually, increased their spending by 19%, cutting real gas consumption by just 1%.
This disparity highlights a K-shaped consumption pattern in gasoline spending, where the wealthy have continued to spend with minimal adjustments while lower-income consumers have had to make more significant lifestyle changes. Researchers from the New York Fed noted that inflation has contributed to this gap, as consumer prices have risen about 28% since the onset of the pandemic, while average hourly earnings have only grown by 30%. Fed Chair Jerome Powell has emphasized that inflation disproportionately impacts those least able to afford escalating prices.
The report further detailed that energy prices have surged by 56% in the post-pandemic economy, with the average gas price hitting $4.30 after a notable increase following the start of the Iran war. This current energy price shock mirrors the trends seen during the 2022 energy spike associated with Russia's invasion of Ukraine, though the current consumption gap is more pronounced. With lower-income households responding to rising prices by reducing consumption more significantly than wealthier households, the implications for the economy and policy decisions are substantial, suggesting a widening divide that could affect overall economic stability.
The research from the Federal Reserve of New York provides a compelling narrative around the K-shaped economy, which has emerged as a defining characteristic of the post-COVID landscape. This economic model illustrates how different segments of the population are experiencing recovery differently, with lower-income households lagging behind their wealthier counterparts. The K-shaped recovery indicates that those at the lower end of the income spectrum have seen significantly less growth than their wealthier peers, who have benefited from a surge in asset values, particularly in the stock market and real estate.
As noted in the report, the K-shaped consumption pattern is evident not only in gasoline spending but across various sectors of the economy. Lower-income consumers are compensating for higher gas prices by buying less, while those in higher income brackets have not changed their behavior much at all despite soaring costs. The study emphasizes that during the March energy price spike, households earning less than $40,000 a year increased their nominal gas spending by just 12%, a stark contrast to the 19% increase seen in high-income households. This behavioral divergence underscores the varying levels of economic resilience and adaptability among different income groups.
The researchers Rajashri Chakrabarti, Thu Pham, Beck Pierce, and Maxim Pinkovskiy pointed out that the K-shaped economy has been a byproduct of the post-COVID period. For many lower-income households, increased spending on essentials like gas does not correspond to an increase in disposable income. Instead, these households are forced to make difficult choices, often cutting back on other necessary expenditures in order to accommodate rising fuel costs. The implications for consumer spending behavior are significant, as these adjustments could lead to a ripple effect throughout the economy, potentially dampening overall growth.
Inflation plays a pivotal role in this economic divide. According to data from the Bureau of Labor Statistics, consumer prices have risen about 28% since March 2020, coinciding with the onset of the pandemic. Despite this significant increase in prices, average hourly earnings have only grown by 30%, indicating that wages have remained largely flat. Fed Chair Jerome Powell has repeatedly highlighted that the current era of inflation disproportionately impacts those least able to afford higher prices. This situation further exacerbates the struggles of lower-income households, who face the dual challenge of rising costs and stagnant wages.
The latest Fed research illustrates that the disparate impacts of the K-shaped economy have been acutely felt during the recent surge in gas prices. Energy prices have climbed 56% in the post-pandemic economy, a staggering increase that has forced lower-income families to reconsider their spending habits. For the March period, following the start of the Iran war, prices at the pump rose nearly a dollar a gallon, reaching an average of $3.81, and subsequently climbing to $4.30, as reported by the Energy Information Administration. This price escalation represents a significant burden for lower-income households, who are already grappling with stretched budgets and limited financial flexibility.
The New York Fed paper emphasizes that the current energy price shock has revealed a much more pronounced K-shaped pattern in gasoline consumption than in previous years. Higher-income households have managed to reduce their real gas consumption only modestly while increasing their gasoline spending considerably compared to earlier periods. In stark contrast, lower-income households have had to increase their spending by much less and decrease real consumption by much more. This behavior may manifest in practical terms, such as carpooling or substituting public transit where available, highlighting the adaptive strategies employed by those with limited resources.
Furthermore, the study draws parallels between the current energy price spike and the energy crisis that followed Russia's invasion of Ukraine in 2022. While the two events share similarities, the report notes that the gap in consumption trends during the current episode is quantitatively larger. This suggests that the economic landscape has evolved, and the disparities between income groups are becoming more entrenched. The findings underscore a growing concern among economists regarding the long-term implications of such a divide on economic stability and growth.
As gas prices continue to rise, the impact on consumer behavior, particularly among lower-income households, remains a critical area of focus. The study utilized a panel of 2,000 respondents to analyze the changes in gasoline spending. Overall, gasoline spending increased by 15% in March, a figure that reflects the broader trends observed in the economy. However, the significant differences in how various income groups respond to these price changes highlight the need for targeted policy interventions aimed at addressing the challenges faced by lower-income households.
In light of these findings, it is essential for policymakers to consider the implications of a K-shaped economy and the structural challenges it presents. As inflation continues to outpace wage growth, the need for effective measures to support lower-income households becomes increasingly urgent. Strategies could include targeted fiscal policies, such as direct financial assistance or subsidies for essential goods, to help mitigate the impact of rising prices on those most affected. Additionally, investing in public transportation infrastructure could provide lower-income households with more affordable alternatives to reliance on personal vehicles, further alleviating the burden of rising gas prices.
The K-shaped economy serves as a stark reminder of the disparities that exist within society and the need for inclusive economic policies that promote equitable growth. As lower-income households continue to struggle with rising gas prices and stagnant wages, addressing these issues is not only a moral imperative but also a matter of economic necessity. Ensuring that all segments of the population have the opportunity to thrive in a recovering economy will be essential for fostering long-term stability and resilience in the face of future economic challenges.