Rising Fuel Prices Create a ‘K-Shaped Economy’ in the United States

As petrol prices continue to rise in the United States, not all consumers are feeling the impact equally. New research from the Federal Reserve of New York shows that lower-income households are cutting back sharply on fuel consumption, while wealthier households are barely changing their behaviour at all.

This is an example of what economists call a “K-shaped economy.” In a K-shaped recovery or economy, different groups experience economic conditions very differently. Some continue to grow stronger financially, while others struggle and fall behind.

The data highlights this divide clearly. Households earning under $40,000 per year increased spending on fuel by only 12% because they reduced the amount of petrol they bought by 7%. In contrast, households earning over $125,000 increased fuel spending by 19% while barely reducing consumption.

This suggests that demand for petrol is more price elastic for lower-income households. In other words, when prices rise, these consumers are more likely to reduce consumption because fuel takes up a larger proportion of their income. Wealthier households, however, are less sensitive to rising prices because they can absorb the higher costs more easily.

Fuel prices have risen dramatically since the pandemic, increasing by around 56%, driven partly by geopolitical tensions and rising energy costs. This has contributed to wider inflation, where the overall price level in the economy increases.

Although wages have also risen, they have barely kept pace with inflation. As a result, many households are experiencing a fall in their real income — the amount of goods and services their income can actually buy.

Lower-income consumers are responding by changing behaviour: driving less, carpooling, or switching to public transport where possible. Meanwhile, wealthier households continue spending relatively normally. This widening gap reflects increasing inequality in the economy.

For economics students, this is a powerful real-world example of how inflation can affect different groups differently. It also demonstrates important concepts such as price elasticity of demand (PED), real income, and inequality.

And if you’ve ever heard someone say “inflation affects everyone equally”… this data suggests otherwise. Some people are cancelling road trips, while others are just paying more at the pump and carrying on as usual.