Gas price spending patterns the latest evidence of an economy brought to you by the Letter K

With gas prices jumping above $4.50 nationwide, there was a timely release from the New York Fed on how high gas prices hit differently, depending on how much money you’ re making.

...We divide all households into low-income (earning less than $40,000 a year) households, middle-income (earning between $40,000 and $125,000) households, and high-income (earning over $125,000) households, as we have done in previous blogs on the divergence in retail spending growth by income level and potential explanations. The high-income households represent approximately a third of all households. In the panel chart below, we present how the rises and falls in spending and consumption varied for the three income types. We deflate gas station spending for each income group using a demographic-specific gasoline price deflator.

We see that the three income categories had very different experiences during the March 2026 energy price shock. Low-income households increased their nominal gas spending by the least (12 percent). However, this was accomplished because they cut their real gas consumption the most (7 percent). On the other hand, high-income households increased their nominal gas spending by the most (19 percent) in a large part because they reduced their real gas consumption the least (1 percent). Middle-income households had intermediate increases in nominal spending and decreases in real consumption at gas stations. Thus, the K-shaped consumption pattern in both nominal and real gasoline spending was strongly evident in March 2026.

These divergences in the response to an energy price shock are not unique to the month. Four years ago, energy prices rose and remained elevated during the spring and summer of 2022 when the Russia-Ukraine war disrupted energy markets. The magnitude of the initial Russia-Ukraine gasoline price shock was broadly similar to the current one, but it lasted longer to date and ramped up over time. As we see from the panel chart below, between January and July 2022, nominal gas spending rose more for high- and middle-income households than it did for low-income households, while real gas consumption declined less for high-income households than it did for middle-income and low-income households. Notably though, while directionally similar, the magnitudes of the gaps (both for nominal and real spending) were noticeably smaller than the corresponding gaps we see in March 2026. Nominal and real spending rebounded to their pre-shock levels after energy prices declined in late 2022.

Which tracks, as lower-income people are the ones most likely to be close to the edge and have to either dip into savings or cut back on spending if any expense goes up. Richer people may get annoyed by the higher prices, but don’t often have to change their spending or investing habits.

We also saw more evidence that economic activity keeps growing without necessarily seeing people getting hired in the process. After the Institute for Supply Management released information showing that manufacturing in America continued to increase output while shedding jobs, we saw the same thing happen in ISM’s report about the nation’s services industry.

In April, the Services PMI® registered 53.6 percent, 1.1 percentage points above its 12-month moving average of 52.5 percent. A reading above 50 percent indicates the services sector economy is generally expanding; below 50 percent indicates it is generally contracting.

A Services PMI® above 48.1 percent, over time, generally indicates an expansion of the overall economy. Therefore, the April Services PMI® indicates the overall economy is expanding for the 71st straight month. Miller says, “The past relationship between the Services PMI® and the overall economy indicates that the Services PMI® for April (53.6 percent) corresponds to a 1.7-percentage point increase in real gross domestic product (GDP) on an annualized basis.”….

Employment activity in the services sector remained in contraction in April for a second month in a row. The Employment Index registered 48 percent, up 2.8 percentage points from the March figure of 45.2 percent and 0.6 percentage point below its 12-month average of 48.6 percent. Comments from respondents include: “We are experiencing large capital investment projects, requiring an increase in sourcing and material purchasing as well as head count” and “Beyond layoffs from the end of the year, there has been an uptick in attrition.”

The “attrition” comment makes sense to me, as we have seen low job growth for the last year, but there’s also a remarkably low amount of layoffs, including the lowest amount of (seasonally-adjusted) new unemployment claims since 1969 at the end of April?

When you have an economy that's as two-track like this, you’re going to get a situation where the typical American thinks the economy isn’t going well and their personal situation is getting worse, but the overall numbers still look good and the stock market loves it (hey, the DOW was back at 50,000 at one point today!).

And as long as enough money is getting sent around and large amounts of people aren’t losing jobs or cutting their consumption all at once, the musical chairs continues. Until someone decides it's time for the music to stop.