A version of this post first appeared on TKer.co
A $4 gallon of gas or an extra $1,000 of income means different things to different people.
Most drivers notice when the price of a gallon of gas goes up by a dollar. But those earning high income don’t feel the pinch quite like those earning low income.
“For low-income consumers, spending on essentials, including energy and food, is a larger share of both their total spending and their income,” Morgan Stanley economists wrote last month. “As of the most recent Consumer Expenditure Survey from 2024, energy spend made up 8.2% of total spending for the bottom 20% income cohort compared to 4.8% for the top. Limiting to just gasoline, gas made up 3.6% for the bottom cohort versus 2.6% for the top.”
Furthermore, fiscal policy affects consumers differently depending on their income level. It usually benefits those at the bottom — but that is not currently happening.
“[We] do not expect the lowest-income cohort (bottom 10-20%) to benefit much from the fiscal bill this year,” the economists added. “Much of this low-income cohort already does not pay federal income taxes because of other credits and deductions, and therefore cannot benefit from the new tax provisions. Meanwhile, some of the spending cuts in the fiscal bill start to ramp up this year, including cuts to SNAP benefits and Medicaid. This will hurt some consumers in that low-income group.”
As a result, the economists expect us to keep hearing about the “K-shaped” narrative, which explains how the economy is being bolstered by wealthier, higher-income folks as they do better while poorer, lower-income folks do worse.
Investors sometimes take the K-shaped dynamic for granted, because revenue is revenue regardless of who’s spending. And if revenue is holding up and earnings are growing, what’s the big deal?
Well, it’s somewhat well-known that if you give two people checks for the same amount of money, the poorer person is likely to spend more of that check right away than the richer person.
Morgan Stanley’s Lisa Shalett discussed this in November: “Much has been made about higher-income cohorts driving a larger share of spending, given wealth effects. That said, on the margin, it remains the lower income cohorts that can impact annual growth of consumption the most, as their marginal propensity to spend an incremental dollar of earnings is more than six times more impactful than that of the wealthiest cohort. On this point, the 2026 outlook is increasingly fragile.”
