Gas tops $6 a gallon in California: "How much pain at the pump can consumers take?"

Gas continues to reach new highs, with average prices hitting a record $4.56 a gallon on Wednesday and topping $6 a gallon in California, the state with the highest prices at the pump, according to AAA.

That's taking a bite out of consumers' budgets, with the typical household spending $4,800 on gas at an annual rate — a 70% jump from a year ago, according to Wall Street economist Ed Yardeni. A year ago, households spent about $2,800 on gasoline each year, he noted in a LinkedIn post about his research. 

"How much pain at the pump can consumers take?" Yardeni asked. 

That's a question that has wide-ranging implications for the U.S. economy, given that consumer spending contributes 70% of GDP. Wages aren't keeping up with surging gas prices — as well as the highest inflation in 40 years — and some households say they're cutting back on eating out and impulse purchases as a result, according to a Harris Poll for Bloomberg News in April.

"No wonder that the Consumer Sentiment Index is so depressed," Yardeni noted. 

Consumer sentiment dropped almost 10% in May, with Americans' assessment of their current financial situation at its lowest point since 2013, when the economy was struggling in the aftermath of the Great Recession, according to a University of Michigan survey.

Yet consumers continue to spend, likely due to personal savings that grew during the pandemic, Yardeni added. During the past two years, multiple rounds of stimulus payments and cutbacks on travel and dining out, while the economy was locked down, helped bolster the personal savings rate.

But there are signs that consumers' budgets are struggling to handle record gas prices and high inflation. Consumers "are charging more on their credit cards," Yardeni pointed out.

And personal savings are starting to dwindle, according to a new study from Northwestern Mutual. Its survey found that 6 in 10 people built up personal savings during the past two years, with the average household reporting savings of $73,000 in 2021. But that's dropped 15% to $63,000 in 2022, the study found. 

Why are gas prices so high?

There's currently no state in the U.S. where drivers are paying an average price of less than $4 a gallon, according to AAA. 

Drivers in California are facing the most pain at the pump, with prices in the Golden State hitting a new record of $6.05 a gallon on Wednesday. The cheapest gas can be found in Kansas, where prices are currently $4.02 per gallon on average. 

The recent surge in gas prices is due to factors including volatile crude oil prices, Russia's war in Ukraine and increased demand from consumers as the economy recovers from the pandemic. The benchmark Brent crude oil is trading at almost $110 per barrel on Wednesday, compared with $67 a barrel a year earlier. 

And gas stations are also switching to their summer blends of gasoline, which AAA says adds as much as $0.10 per gallon. The annual switch isn't related to the Biden Administration's plan to allow E15 gasoline, which is 15% ethanol, to be sold through the summer. That blend is typically banned for purchase from June 1 to September 15. 

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• Gas Prices