Iran war, oil price surge worsen K-shaped economy, say economists

The war in Iran — and the accompanying spike in oil and gasoline prices — risks exacerbating the so-called K-shaped economy, economists said.

The term, which emerged during the Covid-19 pandemic, uses the letter K to illustrate diverging economic experiences: higher-income households do better and better, forming the upward arm, while lower-income households fall further behind on the downward arm.

Economists said a rise in oil and gasoline prices acts as a tax on household spending power that tends to hurt low earners more than the wealthy.

Nicholas Bloom, an economics professor at Stanford University, said he worries that the dynamic fuels the economy’s K shape.

“That, I think, is a major concern as an economist: inequality,” Bloom said Monday during a webinar on the economic consequences of the Iran war.

The war in Iran has effectively halted traffic through the Strait of Hormuz, a critical maritime shipping route for global oil supplies, amounting to the biggest oil supply disruption in history.

Oil prices — and those for gasoline, which is refined from crude oil — have soared as a result.

Brent crude, the global benchmark for oil, is up more than 40% since the conflict began on Feb. 28, to about $102 per barrel as of 2 p.m. E.T. on Tuesday.

The national average gasoline price reached $3.79 a gallon as of Tuesday, up about 87 cents per gallon, or 30%, from a month ago, according to AAA.

Average gasoline prices are higher than at any point since October 2023, according to the U.S. Energy Information Administration.

“This is especially hard on lower and middle-income households, who have little or no financial resources, and so if they need to put more of their earnings in their gas tank, they have to cut other spending or pay on their credit cards and other debts more slowly,” said Mark Zandi, chief economist at Moody’s. 

“Higher gasoline prices act like a regressive tax, as lower-income households devote a higher share of their budget to energy,” he said.

The notion of wealth and income inequality isn’t new.

Stock market rallies and appreciating home values tend to buoy the upper echelon, who disproportionately own such assets, and leave lower-income households behind.

However, the Covid-19 pandemic turbocharged those dynamics — as stock and housing wealth soared and lower earners struggled to recover from high unemployment and rising prices — giving rise to the concept of a “K-shaped” economy.

Before the U.S. and Israel attacked Iran, the high cost of living caused a growing affordability crisis, which also contributed to an increasingly bifurcated nation. 

Now, gasoline prices are dragging down the lower prong of the K, too.

Michael Klein, an economics professor at Tufts University, said higher oil prices — similar to tariffs — act as a “tax on people’s ability to spend.”

In this case, households pay the tax to oil companies, not the federal government, he said during the webinar on the Iran war’s economic impact.

If households spend more of their income on gasoline, they have less income to buy other goods and services, Klein said. That shift in consumer consumption could have a negative impact on the U.S. economy, since consumer spending accounts for the bulk of the nation’s gross domestic product, he said.

Volatile oil prices have a knock-on effect, driving prices higher in other sectors of the economy, experts said.

For example, U.S. diesel prices on Tuesday topped $5 per gallon for the first time since 2022, when Russia’s invasion of Ukraine disrupted global energy markets. That drives up trucking costs, for example, which could, in turn, push up the prices of food and other goods and services, economists said.

Global prices for jet fuel, a major cost component for airlines, are up about 83% over the past month, according to International Air Transport Association data as of Mar. 13.

“Higher fuel costs, along with the downstream effects on shipping, travel, and trade, are likely to add further pressure to consumer prices,” said certified financial planner Stephen Kates, a financial analyst at Bankrate.

Often, companies pass at least some of that expense on to consumers.