The Haves and Have-Nots at the Center of America’s Inflation Fight
The third year of America’s inflation fight is widening a split at the heart of the economy.
The stock market is soaring, household wealth is at record levels and investment income has never been greater. At the same time, some families’ pandemic-era savings are running dry, and delinquencies on credit card and auto-loan payments have jumped.
Warning signals are flashing for more low- and middle-income Americans, exposing a division between people whose gains are being whittled down by elevated inflation and borrowing costs and those who are benefiting from high asset prices and bond returns. The crosscurrents are scrambling the outlook for the U.S. consumer—a bedrock of economic growth, corporate business plans and Wall Street investments.
Inflation had damaged President Biden’s re-election bid long before he dropped out of the race. Now, analysts expect Vice President Kamala Harris will broadly pitch an extension of his agenda, even as many voters blame it for exacerbating price pressures. Former President Donald Trump, meanwhile, has proposed policies including tax cuts and tariffs that many economists warn could buoy inflation going forward.
While voters decide who they fault for price hikes and which candidate might offer remedies, America’s economy continues to defy expectations of a slowdown and muscle ahead of other wealthy nations. The U.S. job-creation machine has boosted wages, recently outpacing inflation. Investors are now growing more hopeful that the Federal Reserve can tame inflation without wreaking widespread havoc.
But that could hinge on the continued resilience of consumers—and whether spending by high-earners can counteract slowdowns elsewhere. As economists await interest-rate cuts that could relieve pressure, the cumulative impact of higher prices and borrowing costs is starting to curb some Americans’ ability to keep up.
“This is the most money we’ve ever made and this is the brokest we’ve ever felt,” said Nicole Lewis, a mother of three who lives north of Flint, Mich.
Pay raises since the pandemic helped Lewis and her husband, now a city manager, double their earnings to what had previously seemed unattainable: more than $90,000 a year. But price hikes for everything from groceries to auto insurance still forced the couple to siphon funds from savings.
The 35-year-old Lewis now buys many basics on credit, juggling cards to protect her credit score without letting outstanding debt snowball. Trips to the beach and bowling alley are out. Shopping at thrift stores is in. She is now leaving her job as a medical assistant to become a teaching aide, a gig that will come with a $1 an hour pay bump while helping her cut back on child care.
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“The top whatever-percent has all this money,” Lewis said. “Those people don’t live like most Americans.”
Wage gains have kept full-time workers’ weekly median earnings roughly steady since early 2020, when taking price hikes into account, according to the Labor Department. But Lewis and many others who have earned raises say they are still fighting their way back from the initial inflationary shock after the pandemic hit.
Middle- and lower-income Americans generally faced faster inflation than the affluent from 2006 to 2023, according to a Labor Department analysis, thanks in large part to housing and insurance prices. New York Fed researchers say aggressive moves to fight inflation also disproportionately hurt the poor through higher borrowing costs and a weaker labor market.
Those slow-moving factors have ground down many households’ budgets. A UBS analysis of federal data showed excess savings accumulated during the pandemic have been fully depleted for the bottom 40% of earners. Now, delinquency rates for credit cards are higher than at any point since the aftermath of the Great Recession in 2010, according to BCA Research. The unemployment rate then was more than double its level now.
Even as the economy powers ahead, some retailers are reporting slowing sales growth in a sign that some shoppers are trading down for cheaper items or pulling back entirely. Wage gains are moderating, while unemployment has inched upward in recent months from 50-year lows. Additional slack in the tight labor market could usher in more pain.
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“The upshot here is that it is going to be harder to avoid a recession,” said Peter Berezin, chief global strategist for BCA Research. “You don’t need a big slowdown in consumer spending to cause problems for the economy.”
An alternate reality is playing out among America’s high earners. In addition to paper gains from stocks and home values, Americans are pocketing more cash than ever from dividends and interest, helping many wealthy people keep pace with inflation, if not outrun it.
Anthony Chan, a former JPMorgan managing director who is now chief economist at the corporate analytics firm BrightQuery, believes a two-track economy is coming into focus.
“Right now,” he said, “you clearly are seeing this big divergence.”
‘No more sticker shock’
Financial markets have provided extra juice to big savers and longtime investors like James De Franco, a retired pharmacist who has owned his home on Long Island in New York for decades.
“Because of my assets, I’m actually making more money than the inflation rate is harming me,” he said.
De Franco, who organizes stock-trading groups where individual investors meet up and swap trading strategies, is increasingly eyeing bonds or money-market funds that can return 5% annually with little risk. “You can’t go wrong with that,” said De Franco, who has a vacation home in Pennsylvania and is visiting Montana’s Glacier National Park later this year.
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On top of stocks’ artificial intelligence bonanza, Americans are earning investment income at a seasonally adjusted rate of about $3.7 trillion annually, according to June Commerce Department data. That is $770 billion more than January 2020. Although Wall Street’s recent pullback from tech has slammed stock prices, the S&P 500 remains 14% higher than the start of this year.
Pointing largely to the soaring market, Goldman Sachs estimates that a so-called wealth effect will drive a 0.3 percentage point growth in consumption over the next year as high earners continue spending through inflation. Citigroup reported in July that affluent customers are driving spending growth.
The proportion of cash offers on existing homes in June grew from 26% to 28% over the previous 12 months, even as nationwide prices notched records. American tourists are splurging on trips everywhere from domestic locales to southern Europe, pushing airlines to ramp up luxury offerings such as exclusive lounges.
“There’s no more sticker shock,” said Joseph Einhorn, who recently launched a high-end personal shopping app called Long Story Short. Membership fees: $1,000 a month.
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Einhorn spends his days tracking down products like Rolexes, helicopters and a $36,000 crocodile-skin Gucci trunk to add to the app, with the goal of getting them to clients faster and cheaper than otherwise possible. Some customers may even see the products as vessels to hold their wealth.
“It’s nothing like the world we grew up in,” Einhorn said.
While spending by the wealthy could buoy demand across the economy, high earners’ historic gains in dollar terms may also come with a downside if they prop up inflation. That would upend Wall Street bets on rate cuts anticipated as soon as September.
Fed Chair Jerome Powell has said that the central bank intends to stick to its current policy until inflation ticks reliably closer to a longstanding 2% target.
“The ultimate pain would be a long period of high inflation,” Powell said at a June news conference. “It is lower-income people, people who are at the margins of the economy, who have the worst experience, who experience the worst pain from inflation.”
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‘Never lived like this before’
Economists have been encouraged in recent months as the Fed’s preferred inflation gauge, the personal consumption-expenditures index, has eased to a 2.5% increase from a year ago. That doesn’t mean price levels have dropped.
Perhaps nowhere is the resulting pain greater than in the housing market, where a long-awaited slowdown is just starting to take hold.
In Brooklyn, many of the roughly 2,500 people who turn to the Council of Peoples Organization for food each week cite housing costs as a key reason they can no longer afford to shop, Chief Executive Officer Mohammad Razvi said. The nonprofit, which provided meals to just dozens before the pandemic, has largely transformed itself into a food bank to keep up with demand.
Blocks away from where people line up for the group’s canned goods and produce on Fridays, developers built a new apartment complex in which the smallest unit recently listed on StreetEasy—a 456-square-foot one-bedroom—was advertised at $460,000.
“Are you kidding me?” Razvi said. “This is not Manhattan.”
While the cost of eating at home has largely held steady in recent months, according to the federal data, grocery store sales have ticked lower as part of a broader slowdown in retail growth. Spending at restaurants and bars has been basically flat since late last year.
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“That is something we definitely don’t do anymore,” said Jace Lehner, a mother of three who lives about 50 miles north of Columbus, Ohio.
Lehner and her husband work on their roughly 2,400-acre family farm, growing crops like corn and soybeans while raising cattle and hogs. As the couple has drawn down savings, they have also pulled back on grocery spending.
Instead, the 28-year-old Lehner increasingly trades homegrown food such as ground beef or steaks with nearby farmers in exchange for eggs, milk and more. “We’re getting by, but it’s close,” she said.
Some analysts and banks say that household finances are largely holding up as the U.S. economy returns to prepandemic norms. Overall debt is still low by historical standards, while some credit-card companies have reported that an uptick in delinquencies stems from tighter lending standards rather than consumer weakness.
David Tinsley, senior economist at the Bank of America Institute, said low-income customers’ spending remains robust as wage gains continue outpacing inflation. Still, there are soft pockets among Gen Z and Millennials who can’t fall back on savings or assets.
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“Any sign of a weakening in wages would be kind of a warning light,” he said.
The resulting pressure would likely be greatest for those who have been battered by higher interest rates in the form of adjustable-rate mortgages or credit-card debt. At an annual rate accounting for seasonal swings, Americans in June were on pace for $531 billion in personal interest expenses in 2024, according to the St. Louis Fed. That’s up 77% from two years earlier.
Credit-card bills piled up so high for Amber Plunkett early this year that she and her husband took out a lower-rate loan from their credit union to help pay down balances. After debt ballooned again with interest expenses and unexpected car repairs, the couple took out a home-equity line of credit on their $230,000 house to catch up.
“We just couldn’t see any other way out,” said Plunkett, who lives north of Lansing, Mich. “There’s no money left in the bank account before the next check comes.”
The combined income of the 41-year-old office assistant and her husband, who installs heating and cooling systems, has grown in recent years to more than $130,000 annually. The sum is far more than average households in the state. Still, a vicious cycle of credit-card debt has forced Plunkett to find more ways to cut back: washing bigger loads of laundry, cooking meals with fewer ingredients, skipping presents at family birthday parties.
The mother of six said she still often pulls out the plastic for necessities like groceries, bills for which can top $1,000 every other week.
“We have never lived like this before,” Plunkett said. “We dreamed about being here, about buying a house, to get a mortgage and make the amount of money we’re making. And we feel like we’re worse off than when we started out.”
Write to David Uberti at david.uberti@wsj.com
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