What $4 gas is doing to U.S. households — and why the economic pain is likely to last

It's a painful moment to fill up your car. Gas just topped $4 a gallon per AAA's nationwide average — up nearly 40% in just over 30 days.

For households across the U.S., the immediate math is straightforward and far from pleasant. In recent years, households have spent around $200 a month on gas. A 40% increase raises the monthly cost by around $100.

This matters because, according to the Bank of America $BAC Institute, nearly one in four U.S. households — about 24% of the total — spend over 95% of their income on necessities like housing, groceries, utilities, childcare, and gas, leaving little or nothing left over. That’s about 31 million households, or around 75 million people.

So, for these financially vulnerable individuals and families, the rising cost of gas is a major increase in the cost of living. Finding an extra $100 a month isn’t easy, and yet gas isn’t a purchase consumers can effortlessly cut back on. It takes time to find alternative ways to work and school, all the more so in areas with little public transportation.

Pain beyond the pump

Worse, the rising cost of gas doesn’t just impact what consumers pay at the pump. It flows through to other everyday costs that are even more inelastic, namely the price of food, plus a vast swathe of necessities from shampoo to laundry detergent.

That’s because, when the price of diesel — which powers the trucks that move everything Americans buy — rises this sharply, the repricing ripples through to groceries and virtually every part of manufacturing supply chains. Agriculture gets hit twice, between diesel fuel for equipment, and fertilizer, which is energy-intensive to produce and often uses petroleum as a major ingredient. Food inflation is essentially guaranteed; the cost of essentials very likely rises, too.

Why the shock is likely to last

Consumers know the drill, of course: Gas prices can spike and retreat when global geopolitical shocks hit. Unfortunately, the one that’s causing this price spike is unlikely to disappear overnight. Oil company CEOs and other experts are betting that the Iran war will continue to keep prices high and potentially moving even higher.

The Strait of Hormuz — the narrow chokepoint through which about 20% of the world's oil supply travels — remains effectively closed. However, the problem isn't just the Strait. Bombing campaigns and missile strikes have damaged or destroyed relevant infrastructure across the region. Oil fields that are still physically intact have gone offline anyway, because they have nowhere to ship what they pump and they’ve run out of storage.

Getting those fields back online after a prolonged shutdown isn't an overnight matter. Crews and staff disperse. Wells develop pressure problems. Pipelines themselves need fixing. Some supply is necessarily gone from the market for months, possibly longer, regardless of when the bombing stops.

That's what makes this moment different from the 2022 price spike, which peaked near $5 and retreated again to $3 relatively quickly.

The present situation is more analogous to 1973, when a deliberate supply removal sent prices rocketing, while the economic damage lasted for years — which is the reason so many headlines are now invoking the term “stagflation.” The usual playbook of economic and monetary policy struggles to respond situations where a supply shock lasts, flows through to the cost of everyday items, and creates inflation which interest rates can’t really mitigate. In short, the Federal Reserve raising interest rates can’t reopen the Strait of Hormuz or bring offline oil fields back online.

That was the problem the U.S. faced in the 1970s. Because the U.S. is, today, a net exporter of energy, it’s better positioned than it was then. But as consumers are learning, this only somewhat moderates the problem of rising fuel costs.

Households are, in key ways, poorer today than they were in the 1970s

Most news articles leave the analysis there, on a note about the U.S.’s stronger position as a net energy producer. But that elides an arguably far more pressing aspect of our economic reality. Households are, financially speaking, worse off today than they were when ‘70s stagflation struck and lasted.

When the Arab oil embargo hit, American households were saving around 11% of their disposable income. The personal savings rate in the 1960s and 1970s averaged 11.7%, peaking around 17% in 1975. Today, Americans are saving an average of 4.4% of their disposable income.

What’s more, the 1973 shock landed on a workforce whose wages were, by historical standards, unusually competitive with those at the top. At that time, the CEO-to-worker compensation ratio was roughly 30-to-1. Today that ratio sits at nearly 290-to-1. In other words, the 1973 oil shock hit households that were saving more, earning a greater share, and carrying less much debt.

This one is hitting households that have less of a financial cushion, and that have watched their wages lose ground to management's for more than 40 years. Before the price of gas crossed $4 a gallon, these households were already borrowing to fund everyday expenses. That’s in part because the availability of household credit has expanded a great deal since the 1970s, but that’s unlikely to comfort Americans who are paying historically high rates for that credit — up around 10 percentage points in the last decade.

The bottom line

For tens of millions of Americans, comparisons to the 1970s could come across as mere academic exercises. What matters are today's rising costs, not the relative position of households a handful of decades ago.

Still, the historical rhyme does reveal something important, suggesting that the economic pain caused by rising gas prices will be with us for at least some months to come, possibly years. And that's a lot to face when you're worried about surviving till your next paycheck.