Why America’s K-shaped economy is worsening as lower-income consumers buckle under inflation

America’s economic divide is deepening as inflation, surging fuel prices, and slowing wage growth continue to hit lower-income households far harder than wealthy consumers, reinforcing what economists describe as a “K-shaped economy.”

Recent analyses from the New York Federal Reserve, the Bank of America Institute, and other economic researchers show that while high-income Americans continue to spend and support economic growth, financially vulnerable households are increasingly cutting back on essentials and struggling under mounting costs.

The latest pressure point has been the sharp rise in oil and gasoline prices following the Iran conflict. Average gasoline prices in the United States climbed to around $4.53 per gallon this week, according to data cited in the reports. Since lower-income households spend a larger portion of their income on fuel, electricity, and daily necessities, they are experiencing the strongest financial shock.

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Data from Liberty Street Economics showed that low-income Americans have sharply reduced gasoline consumption in an effort to cope with higher prices. Wealthier households, however, have largely maintained their spending habits despite the increase in fuel costs. Economists say this difference in spending behaviour is a defining feature of the widening K-shaped economy.

Consumer sentiment among Americans earning less than $50,000 annually has fallen close to levels seen during the COVID-19 pandemic, reflecting growing economic anxiety. Meanwhile, sentiment among households earning over $100,000 has remained relatively strong and has even improved in recent months.

The gap is also becoming visible in wage growth and spending trends. Bank of America Institute data showed that higher-income households recorded wage growth of around 5.6 per cent year-on-year in March, significantly higher than gains for middle- and lower-income groups. Spending growth among affluent households also continues to outpace the rest of the population.

Economists warn that prolonged inflation and energy price shocks could worsen financial stress for vulnerable households, potentially leading to rising credit card and auto-loan delinquencies. Analysts say the growing imbalance risks weakening broader consumer demand over time, even as spending among wealthy Americans remains resilient.