The US economy was supposed to start the year with a bang, fuelled by an unusually large jump in tax refunds from President Donald Trump’s tax cut legislation.
Yet spiking petrol prices are on track to eat up those refunds, leaving most Americans with little extra to spend.
“Next spring is projected to be the largest tax refund season of all time,” Trump said in a prime-time speech in December that was intended to address voters’ concerns about the economy and stubbornly high prices.
But that was before the Iran war, which began on February 28.
Oil and gas prices have soared since then, with the nationwide average price of petrol reaching $US3.94 ($A5.62) per gallon on Sunday, up more than a dollar from just a month earlier.
Petrol 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 in the coming months and for the year as a whole, as people have less money for restaurant meals, new clothes, or entertainment.
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 petrol.
“The energy shock is going to hit those who have the least cushion,” said Alex Jacquez, chief of policy at the left-leaning Groundwork Collaborative and a former economist in the Biden White House.
“And it doesn’t look like those tax refunds are going to be here to save them.”
Neale Mahoney, director of the Stanford Institute for Economic Policy Research, calculates that petrol prices could peak in May at $US4.36 ($A6.22) a gallon, based on oil price forecasts by Goldman Sachs, followed by slow declines for the rest of the year.
The notion that petrol prices decline much more slowly than they rise is so ingrained among economists that they refer to it as the “rocket and feathers” phenomenon.
In that scenario, the average household would pay $US740 m ($A1.1 billion) more in petrol this year, nearly equal to the $US748 ($A1,066) increase in refunds that the Tax Foundation has estimated the average household will receive.
Through March 6, refunds have risen by much less than that, according to IRS data.
They have averaged $US3676 ($A5241), up $US352 ($A502) from $US3324 ($A4739) in 2025.
Still, average refunds could rise as more complex returns are filed.
Other estimates show similar impacts. Economists at Oxford Economics, a consulting firm, estimate that if petrol prices average $US3.70 ($A5.28) a gallon all year, it will cost consumers about $US70 billion ($A100 billion) — more than the $US60 billion ($A86 billion) in increased tax refunds.
The petrol price spike comes with many consumers already in a precarious position, particularly compared to 2022, when petrol prices also soared because of Russia’s 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.
Now, hiring is nearly at a standstill and Americans’ saving rate has steadily fallen in the past few years as many households borrow more to sustain their spending.
“When you start looking across the perspective from a consumer side, you’re seeing people who have maxed out their credit cards, are using ‘buy now, pay later’ to purchase their groceries,” said Julie Margetta Morgan, president of The Century Foundation, a think tank.
“They’re making it work for now, but that can fall apart quite quickly.”
The impact will likely worsen the “K-shaped” narrative around the US economy, analysts said, in which higher-income households have fared better than lower-income households.
The bottom 10 per cent of earners spend nearly 4.0 per cent of their incomes on petrol, Pantheon Macroeconomics estimates, while the top 10 per cent spend just 1.5 per cent.
For now, most analysts still expect the US economy to expand this year, even if more slowly, given the gas price shock.
Higher petrol prices will likely worsen inflation in the short run, but over time, weaker spending will also slow growth.