How the Iran war adds to the US economy is shaped like K by the high price of gas | Good luck

Iran’s effective blockade of the Strait of Hormuz has starved the world economy of about 20% of its usual oil supply, and Americans see the result every time they pass a gas station. Average gasoline prices in the United States hit $4 a gallon on Tuesday, the first time the limit has been crossed since 2022.

And expensive gas is a big problem for some families. When the price of gasoline rises, it takes away disposable income from the wider economy, forcing some households to make difficult decisions about where to invest their money. By eroding the spending power of low-income households and leaving the finances of the wealthy relatively protected, the Iran war could add even more fuel to the country’s growing K-shaped economy, according to a Moody’s Analytics report published this week.

“While household consumption remains the main driver of US economic growth, ongoing conflicts in the Middle East and rising oil prices are testing its resilience,” the report’s authors wrote. “If the conflict drags on for a long time, fear can reduce domestic purchasing power and moderate spending.”

An important role the use of money plays

The American economy depends heavily on Americans willing to spend money. At the end of last year, consumer spending was 68% of GDP, according to the Federal Reserve. That’s why consumer spending data is considered an important indicator of the economy, and why markets respond well to releases detailing monthly retail spending and consumer confidence.

But too much spending can turn into a dangerous addiction. Moody’s analysts, including Mark Zandi, the firm’s chief economist, have repeatedly warned that the majority of spending is coming from a small segment of consumers, particularly the wealthy.

In a report last year, Zandi wrote that the U.S. economy is “overwhelmingly supported by the wealthy,” finding that only 20% of the nation’s income distribution has spent enough to outpace inflation in recent years. By another metric, the top 10% of Americans with the highest incomes accounted for half of all consumer spending last year.

Moody’s framed the difference as evidence of a K-shaped economy, where the highest earners are doing better than ever and seeing their wealth grow, while lower- and middle-income groups are dealing with stagnant incomes and growing affordability problems.

The problem with expensive gas

More expensive fuels can speed up the process. Low- and middle-income earners spend large portions of their wealth on essentials including transportation, food, and shelter, meaning their spending power declines rapidly as commodity prices rise.

“Higher fuel and utility costs act as a tax on households by reducing real income,” Moody’s analysts wrote in a recent report. “When consumers spend more on essential goods and services, they will reduce spending elsewhere.”

This effective tax comes at a critical time for many Americans, as real incomes begin to decline and households are drawing down their savings to near-historic levels, according to Moody’s. Real wages fell 0.3% for low-wage workers last year, according to the Economic Policy Center, a shift from post-pandemic trends when low- and middle-income workers stood out.

The high fuel tax has already had a significant impact on household finances. In the month since the war began, Americans may have paid an additional $ 8.4 billion in gasoline, according to an analysis published on Thursday by the Democratic members of the Joint Economic Committee, a standing group of congress.

Although the committee did not break down the cost burden by income group, the amount Americans pay at the pump may leave a large gap in their overall income. Households in the bottom fifth of income spent 18.3% of their income on gasoline in 2021, more than double the average of 7.7%, according to an analysis by the American Council for an Energy-Efficient Economy, an advocacy group.

Higher gas prices could also hurt wealthy Americans in the end. Moody’s analysts warned that high fuel prices could “reduce some domestic purchasing power” and high-income groups would have had higher tax refunds this year.

The tax provisions in Donald Trump’s One Big Beautiful Bill Act last year paved the way for larger-than-normal tax refunds, especially to benefit the wealthiest Americans. The latest analysis from Oxford Economics, a consultant, estimated that this year’s return will rise by 60 billion dollars, but the long period of high oil prices will be enough to “seek well” to cancel all those payments this year.