US consumer spending hit by oil as $3,500 tax bonus fades

A potent one-two punch of fading tax rebates and soaring energy costs is threatening to stall the U.S. consumer spending engine, raising red flags for the broader economy. The boost from a Trump-era tax credit that averaged nearly $3,500 per household is waning just as a conflict in the Middle East has contributed to a roughly 50 percent spike in U.S. gasoline prices, eroding purchasing power and hitting consumer confidence.

"The tax rebate boost has been largely offset by price pressures from the Middle East situation," Gregory Daco, chief economist at EY, said. "The longer the conflict lasts, the closer we get to a scenario of sustained high inflation and eroded consumer growth."

The pressure on households is multifaceted. The "One Big Beautiful Bill Act," which began distributing rebates in February 2026, provided a temporary lift to retail sales. However, that fiscal tailwind is meeting a stiff headwind from energy prices. A blockade of the Strait of Hormuz since the conflict began on Feb. 28 has disrupted global oil flows, leading to higher costs at the pump. Data from PNC Bank shows household spending on gasoline was up nearly 40 percent in recent weeks from a year ago, while warehouse retailer BJ's Wholesale Club reported its members spent an extra $143 million on fuel in April alone.

These headwinds are creating a "speed bump" for U.S. economic growth and are now visibly straining household finances. The University of Michigan's consumer sentiment index has fallen to a record low, below the bottom reached in 2022. Data from the New York Federal Reserve shows a rise in delinquency rates for credit cards, auto loans, and student loans, signaling that financial stress is becoming more widespread.

The Fading Tailwind

Retail executives who had benefited from the rebate-fueled spending are now bracing for a slowdown. While home improvement retailer Lowe's noted some consumers were holding onto their rebate cash amid uncertainty, most see the benefits as fleeting.

Target Corp. Chief Financial Officer Jim Lee stated that the "upward bonus" from the rebates will dissipate through the rest of the year. Similarly, Advance Auto Parts CEO Shane O'Kelly said sales growth could moderate as the company moves "beyond the recent tax refund tailwind," just ahead of the crucial summer driving season.

An Uneven Burden

The impact is not being felt equally across the population. According to estimates from Bank of America, the highest-earning third of households saw a rebate increase of about 13 percent, compared to just six percent for the bottom third.

These lower-income households are also the most vulnerable to the energy price shock, as fuel and food make up a larger portion of their budgets. "The rebate bonus has disproportionately gone to those who are least affected by inflationary pressures," said Mike Reid, chief economist at RBC. "It's the middle-income group that is really feeling the pressure."

This divergence is clear in corporate results. Walmart CFO John David Rainey acknowledged that while his high-income customers have "plenty of spending power," lower-income shoppers are "more strained and are managing through what is likely a tougher economic situation."

Confidence Hits Record Low

The growing financial strain is reflected in plummeting consumer morale. A survey from the University of Michigan found that 57 percent of consumers believe high prices are eroding their personal financial situation, up from 50 percent the previous month.

"It's pretty much across all age groups and demographics," Tarang Amin, CEO of Elf Beauty, said of the pessimistic mood. "The consumer is concerned about inflation and the cost of living." This sentiment is a critical indicator, as worried consumers are more likely to pull back on discretionary spending, which could trigger a broader economic slowdown.

This article is for informational purposes only and does not constitute investment advice.