Households are reducing spending on travel, restaurants, and entertainment, but transportation costs tied to daily commuting are unavoidable.
That is the calculation millions of American households are running as gas prices remain elevated four months into the conflict with Iran.
The national average for a gallon of regular gasoline peaked at $4.56 on May 21, a four-year high, before easing to $3.99 by June 18, the lowest national average since late March, according to AAA.
Pump prices remain roughly 29% above where they stood a year ago, and the broader cost of that increase is now reshaping consumer behavior across the country.
The consumer price index rose 4.2% in May on an annual basis, its fastest pace since April 2023, the Bureau of Labor Statistics reported.
Energy costs alone accounted for more than 60% of the monthly increase, with gasoline prices surging 40.5% compared with a year earlier.
Dining, travel, and entertainment absorb the blow
Nearly 80% of Americans have changed their spending habits because of higher fuel costs, a CNBC All-America Economic survey of 1,000 people found in April.
About 60% of respondents said they cut back on entertainment, including eating out, movies, and concerts, to offset the increase at the pump. More than half of those surveyed plan to travel less this summer, and over 50% believe gas prices will stay elevated for at least six months, the survey found.
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The restaurant industry is feeling the impact most visibly, with diners pulling back as fuel costs consume a growing share of household budgets.
A Numerator survey of drivers found that 43% have already cut spending on dining out and takeout since prices began climbing, CNBC reported.
Larger tax refunds cushioned retail, but the buffer is fading
Retail sales stayed strong in the first quarter, even though consumer confidence fell to record lows, with several large chains reporting solid results.
The disconnect has a clear explanation: many households received tax refunds at the same time gas prices began to rise, giving spending a temporary boost.
The One Big Beautiful Bill Act reduced individual income taxes for 2025 by an estimated $129 billion, the Tax Foundation reported.
Total refunds rose by roughly $55 billion this filing season, and the average refund climbed to about $3,500 from $2,940, Morgan Stanley Research estimated.
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Target reported comparable sales growth of 5.6% in its fiscal first quarter, comprising a 4.7% same-store sales gain and 8.9% digital growth, its first positive comparable reading in five quarters, according to the Security and Exchange Commission.
Chief Financial Officer Jim Lee acknowledged that higher refunds helped fuel the spending but cautioned that the benefit will fade over the remainder of the year, CNBC reported.
Off-price retailers captured even larger gains from the refund windfall, with Ross Stores posting comparable sales growth of 17%, nearly double the 9% analysts projected.
Burlington Stores estimated that refunds accounted for 1.5 to 2 percentage points of its 6% comparable sales growth during the same period.
Lower-income households face a growing squeeze from fuel costs
Middle- and high-income households captured most of the gains from new deductions for tips, overtime, and a higher state and local tax cap, the Morgan Stanley Research noted.
For the lowest-income consumers, benefits were limited because many in that group already pay no federal income tax, Morgan Stanley economists noted.
Kate McShane, Co-Head of U.S. Consumer Research at Goldman Sachs, told the firm’s research publication in May 2026 that lower-income households have virtually no room left to absorb another round of energy-driven price increases.
“At the lowest end of that income cohort … at $50,000 income per year and below, there’s only so many ways they can stretch their dollar,” McShane said.
Goldman Sachs has twice cut its forecast for 2026 discretionary cash flow growth, from 5.1% to 3.7%, largely because of higher gasoline prices.
The bottom-income quintile faces projected pre-savings discretionary cash inflow growth of just 0.8% this year, far below the aggregate rate, Goldman Sachs found.
Lower-income households devote roughly four times as much of their after-tax income to gasoline as the top quintile, Bonnie Herzog at Goldman Sachs noted.
Fading refunds raise the stakes for the second half of 2026
The temporary nature of the refund cushion is what concerns economists heading into the summer, particularly as back-to-school spending approaches in late August.
“Inflation is the key drag on the U.S. economy now,” Heather Long, chief economist at Navy Federal Credit Union, told CNBC. “For the first time in three years, inflation is eating up all wage gains.”
Even a swift resolution of the Iran conflict will not immediately reverse the trajectory of inflation, Moody’s Analytics chief economist Mark Zandi told CBS News.
The pass-through of elevated energy costs will broaden to nearly all manufactured goods, as well as to agriculture and construction, Zandi said.
The Federal Reserve has held its benchmark rate at 3.50%–3.75% for four straight meetings, complicating the outlook for borrowers carrying credit card and mortgage debt, CNBC reported.
At the June 17 meeting, the Federal Open Market Committee’s (FOMC) updated dot plot moved the median end-2026 funds rate to 3.8%, with nine of 18 officials projecting at least one rate hike this year.
Bank of America Global Research has dramatically reversed its rate outlook, now projecting three-quarter-point Fed rate hikes in September, October, and December 2026, CNBC reported.
For now, the tradeoff holds steady: Americans are paying more to drive and cutting spending nearly everywhere else to keep budgets intact.
Related: Iran peace deal could push gas prices to $3.50 within weeks
