Investing.com -- Higher oil prices have emerged as a fresh headwind for the U.S. economy, with Wells Fargo warning that the balance of risks is now tilting to the downside as households face renewed pressure on real incomes.

Wells Fargo analysts noted the sharp rise in prices, which they note is creating a drag on purchasing power at a moment when “the labor market is already soft.”

The bank highlighted that employment growth has stalled over the past year, while real personal income excluding transfers is losing momentum because of “slowing wage growth and persistent inflation.”

A sustained rise in gasoline prices could push inflation “back above 3% in the near term” and risk “outright declines in real income over the next few months.”

But Wells Fargo also stressed that the economy is more resilient to energy shocks than in the past.

The sensitivity of overall consumer spending has “diminished over time,” reflecting a larger services share, demographic shifts and ongoing fiscal support.

Wells Fargo’s modelling shows that a moderate oil shock would slow, but not reverse, real PCE growth, adding that it would take a larger and more persistent increase to cause the kind of contraction “typically associated with recession.”

Even so, the bank cautioned that the risks are asymmetric if higher fuel costs erode sentiment or tighten financial conditions.

For now, its baseline remains intact, expecting two 25 basis point rate cuts this year and a year-end 10-year Treasury yield of 4.25%, but “the longer oil prices remain elevated, the more difficult that may be to realize.”