Inflation is widening the divide between how the wealthy and everyone else sees the economy

Inflation is widening the divide between how the wealthy and everyone else sees the economy

A steadily growing economy and low unemployment have helped to ease some of the pain of high inflation, but middle- and low-income Americans say they are feeling more stress.

The latest evidence was a drop in the consumer sentiment index in June to a seventh-month low. The decline stemmed mostly from rising anxiety among middle-and lower-income Americans.

The widening gap in how Americans perceive the economy is not a big surprise, of course. Richer households have a bigger financial cushion, economists note, and the surging stock market has added to their paper wealth.

Americans of lesser means, on the other hand, have mostly used up their savings from the pandemic era. They now have to rely on what they earn from their jobs to keep up with ever-rising prices.

The persistence of high inflation and high interest rates have put greater strain on their budgets, economists say. Credit card usage has gone up and more people are defaulting on auto and other loans.

One saving grace has been a big increase in incomes in the past several years. A tight labor market has forced businesses to pay employees more and many job switchers earned big raises.

A recent report by the nonpartisan Congressional Budget Office found that incomes have slightly outpaced inflation since 2019. As a result, the CBO contended, most families are paying out a slightly smaller portion of their income for staples.

The benefits have not been shared equally, though, and not everyone’s income has kept up with inflation.

The CBO estimates the highest earners spent 6.3% less of their income on goods and services in 2023 than they did in 2019.

The lowest earners, by contrast, spent only 2% less.

Th difference helps explain why the wealthy are less worried about inflation than those in other income brackets.

What’s more, lower-income households have seen bigger price increases for the goods and services they typically purchase compared to wealthier people, the CBO found. And their wages have not gone up as fast.

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 start to reduce spending, it could throw a wrench into the economy.

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