The rising cost of gas is squeezing American households, particularly those with lower incomes, as they struggle to balance their budgets. According to a report by the Bank of America Institute, lower-income households are spending a larger portion of their income on gas, with the share rising to 4.2% in March, up from 3.9% a year ago. This is the highest level for the month of March since 2022. In contrast, the average household across all income groups spent about 3.1% of their income on gas in March, an increase from 2.8% relative to the same time last year. The Iran war has been a significant factor in the surge in gas prices, causing the price of oil to rise above $100 a barrel and gas prices to soar over 40%. This has led to a painful rise in gas as a share of income for people, but it's not as large as the rises seen after the financial crisis and COVID. The Bank of America Institute also found that American households, especially those at lower income levels, are seeing their budgets squeezed by higher gas costs. While higher-income households are experiencing strong wage growth, lower- and middle-income households are not, with wage growth of just 1% and 2%, respectively, through March. This has led to a situation where lower-income households have less room for discretionary spending and are more likely to turn to credit and buy now, pay later to manage their finances. However, the use of buy now, pay later options may not provide a long-term solution, as it only smooths spending over a few months. One silver lining is that households across income levels have more savings in the bank relative to before the COVID-19 pandemic, thanks to larger tax refunds. This can help them weather the gas shock for a time, but the overall story remains challenging for lower-income households.
