How Inflation is Sharpening Economic Divides: Wealthy vs. Everyone Else

Lower-Income Americans Increasingly Worried About the Economy

Despite a steadily growing economy and low unemployment easing some of the pain of high inflation, middle- and low-income Americans are feeling more stress.

Recent evidence includes a drop in the consumer sentiment index in June to a seven-month low, primarily due to rising anxiety among middle- and lower-income Americans.

This widening gap in economic perception is not surprising. Wealthier households have larger financial cushions and benefit from a surging stock market that boosts their wealth.

In contrast, lower-income Americans have largely depleted their pandemic-era savings and must now rely on their job earnings to keep up with rising prices. Persistent high inflation and interest rates are straining their budgets, leading to increased credit card usage and more loan defaults.

One positive development is the significant income growth in recent years. A tight labor market has forced businesses to pay more, and job switchers have received substantial raises.

A recent Congressional Budget Office (CBO) report found that incomes have slightly outpaced inflation since 2019. As a result, most families spend a smaller portion of their income on essentials.

However, these benefits are unevenly distributed. The highest earners spent 6.3% less of their income on goods and services in 2023 than in 2019, while the lowest earners spent only 2% less. This disparity explains why the wealthy are less worried about inflation.

Moreover, lower-income households face higher price increases for their typical purchases compared to wealthier people, and their wages have not risen as quickly.

What does the growing lack of confidence among many Americans mean for the economy?

Nationwide financial market economist Oren Klachin noted that middle- and lower-income people spend most of their earnings on consumer goods and services. If they reduce spending, it could disrupt the economy.

“This will be an important dynamic to watch in the second half of this year,” he said.