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The U.S. economy was supposed to start the year with a bang, fueled by an unusually large jump in tax refunds from President Donald Trump\u2019s tax cut legislation. Yet spiking gas prices are on track to eat up those refunds, leaving most Americans with little extra to spend.<\/p>\n
\u201cNext spring is projected to be the largest tax refund season of all time,\u201d Trump said in a prime-time speech in December that was intended to address voters\u2019 concerns about the economy and stubbornly high prices.<\/p>\n
But that was before the Iran war, which began Feb. 28. Oil and gas prices have soared since then, with the nationwide average price of gas reaching $3.94 Sunday, up more than a dollar from just a month earlier.<\/p>\n
Gas prices are likely to remain elevated for some time, even if the war ends soon, because shipping and production have been disrupted and will take time to recover. Economists now expect slower growth this spring and for the year as a whole, as dollars that are spent on gas are less likely to be used for restaurant meals, new clothes, or entertainment.<\/p>\n
Lower and middle-income households are likely to be hit particularly hard, because they receive lower refunds, while spending a greater proportion of their earnings on gas.<\/p>\n
\u201cThe energy shock is to going to hit those who have the least cushion,\u201d said Alex Jacquez, chief of policy at the left-leaning Groundwork Collaborative and a former economist in the Biden White House. \u201cAnd it doesn\u2019t look like those tax refunds are going to be here to save them.\u201d<\/p>\n
Neale Mahoney, director of the Stanford Institute for Economic Policy Research, calculates that gas prices could peak in May at $4.36 a gallon, based on oil price forecasts by Goldman Sachs, followed by slow declines for the rest of the year. The notion that gas prices decline much more slowly than they rise is so ingrained among economists that they refer to it as the \u201crocket and feathers\u201d phenomenon.<\/p>\n
In that scenario, the average household would pay $740 more in gas this year, nearly equal to the $748 increase in refunds that the Tax Foundation has estimated the average household will receive.<\/p>\n
Through March 6, refunds have risen by much less than that, according to IRS data: They have averaged $3,676, up $352 from $3,324 in 2025. Still, average refunds could rise as more complex returns are filed.<\/p>\n
Other estimates show similar impacts. Economists at Oxford Economics, a consulting firm, estimate that if gas prices average $3.70 a gallon all year, it will cost consumers about $70 billion \u2014 more than the $60 billion in increased tax refunds.<\/p>\n
The gas price spike comes with many consumers already in a precarious position, particularly compared to 2022, when gas prices also soared because of Russia\u2019s invasion of Ukraine. At that time, many households still had fattened bank accounts from pandemic-era stimulus payments and companies were hiring rapidly and sharply lifting pay to attract workers.<\/p>\n
Now, hiring is nearly at a standstill and Americans\u2019 saving rate has steadily fallen in the past few years as many households borrow more to sustain their spending.<\/p>\n
\u201cWhen you start looking across the perspective from a consumer side, you\u2019re seeing people who have maxed out their credit cards, are using \u2018buy now, pay later\u2019 to purchase their groceries,\u201d said Julie Margetta Morgan, president of The Century Foundation, a think tank. \u201cThey\u2019re making it work for now, but that can fall apart quite quickly.\u201d<\/p>\n
The impact will likely worsen the \u201cK-shaped\u201d narrative around the U.S. economy, analysts said, in which higher income households have fared better than lower-income households. The bottom 10% of earners spend nearly 4% of their incomes on gasoline, Pantheon Macroeconomics estimates, while the top 10% spend just 1.5%.<\/p>\n
For now, most analysts still expect the U.S. economy to expand this year, even if more slowly, given the gas price shock. Higher gas prices will likely worsen inflation in the short run, but over time weaker spending will also slow growth.<\/p>\n
American consumers and businesses have repeatedly shaken off shocks since the pandemic \u2014 soaring inflation, rising interest rates, tariffs \u2014 and continued to spend, defying concerns that the economy would tip into recession. Many economists note that the proportion of their incomes that Americans spend on gas and other energy has fallen significantly compared with a decade ago.<\/p>\n
Data from the Bank of America Institute, released Friday, showed that spending on gas on the bank\u2019s credit and debit cards shot 14.4% higher in the week ended March 14 compared with a year ago. Before the war, such spending was running 5% below the previous year, a benefit to consumers.<\/p>\n
Spending on discretionary items \u2014 restaurant meals, electronics, and travel \u2014 is still growing, the institute said, evidence of consumer resilience. But there is little sign it is accelerating, as many economists had hoped.<\/p>\n
\u201cThe longer these gasoline prices persist, the more that will gradually sap consumer discretionary spending,\u201d said David Tinsley, senior economist at the institute.<\/p>\n
Other analysts expect growth will slow because of the war. Bernard Yaros and Michael Pearce, economists at Oxford Economics, forecast that the U.S. economy will grow just 1.9% this year, down from an earlier estimate of 2.5%.<\/p>\n
\u201cWe had anticipated a lift in spending from a bumper tax refund season,\u201d they wrote, \u201cbut the rise in gasoline prices, if sustained, would more than offset that boost.\u201d<\/p>\n<\/div>\n