top of page

Economic Challenges Across Income Groups and the Impact on Consumer Spending

Jan 21

4 min read

In recent years, workers in lower-paid industries have faced significantly tougher economic conditions than their higher-income counterparts. While wage growth for higher-income households has slowed, these individuals are still better equipped to absorb the impacts of inflation. Conversely, lower-income households are grappling with a steeper cost of living, particularly as inflation for essentials like groceries, housing, and utilities has outpaced inflation for discretionary items. This unequal burden of rising costs makes it harder for lower-income consumers to maintain their purchasing power, leading to increased reliance on credit. Additionally, savings rates have fallen, putting many working-class households in precarious financial situations that could worsen if external pressures, like tariffs, continue to intensify. Despite these challenges, consumer spending has remained relatively resilient, largely because households are relying on borrowing to sustain their spending habits, which masks the underlying financial struggles of lower-income consumers.


This divide between high- and low-income consumers creates significant economic and political challenges. Higher-income households, which account for a disproportionately large share of overall consumer spending, continue to drive consumption growth. However, the struggles of lower-income households are becoming more pronounced, especially in sectors that serve this demographic. The slowdown in wage growth and the rising cost of living create a difficult environment for lower-wage earners, and this presents a dilemma for policymakers, particularly at the Federal Reserve. The Fed must balance the need to control inflation with the risk of exacerbating economic conditions for vulnerable workers. The cooling labor market, particularly in lower-wage sectors, exacerbates this divide and underscores the difficulty of achieving broad-based economic stability. Weaker real income growth among lower-income groups has also made saving more difficult. While forced thrift and pandemic-related fiscal support led to a surge in savings early in the cycle, households have since reduced their savings rates just to maintain spending levels. The overall personal saving rate is currently below five percent, which is significantly lower than pre-pandemic levels. Lower- and middle-income households have experienced negative saving rates since early 2022, which places them at greater financial risk.


The difficulty of saving is compounded by the challenge of building wealth, particularly for lower-income households. While net worth has generally increased across all income groups since the pandemic, some lower-income segments have seen their wealth grow faster than higher-income households. However, the rise in household debt, particularly credit card debt, is a significant concern. With interest rates higher than in previous years, carrying debt has become more expensive, leading to rising delinquency rates, especially among younger and lower-income borrowers. This reflects the growing financial strain on these households, even as net worth figures appear relatively stable. The rising debt levels highlight the vulnerability of lower-income consumers, who are increasingly finding it difficult to stay on top of their financial obligations, thus impeding their ability to accumulate wealth.


In terms of consumer spending, a stark divide exists between income groups. While lower-income households tend to spend a larger percentage of their income on essentials, higher-income households contribute a far larger share to overall consumer expenditures. In fact, the top twenty percent of households account for between forty percent and sixty percent of total consumer spending. This disparity is reflective of the broader income inequality in the U.S., where wealthier households drive much of the consumption. Even though lower-income consumers are facing significant financial pressures, overall consumer spending is still expected to grow by more than two percent this year, driven by the continued spending of wealthier households. However, the financial difficulties of lower-income groups are evident in weakening consumer sentiment and growing credit card delinquencies, which reflect the growing strain on their finances.


For lower-income consumers, the challenges are exacerbated by higher costs of living, particularly for necessities, and the increasing reliance on credit cards to sustain spending. As savings rates continue to decline and inflation persists, the financial health of lower-income households deteriorates. Despite these challenges, upper-income households' ability to sustain spending, even in the face of rising inflation and interest rates, supports overall consumer spending growth. However, this growing divide between income groups is likely to influence the Federal Reserve’s policy decisions in the coming months. Policymakers are aware of the disproportionate impact inflation and economic slowdowns have on lower-income households, and this may encourage the Fed to tolerate inflation running slightly above its target and delay rate cuts in an effort to avoid further harm to vulnerable workers.


This divergence in economic conditions between income groups is not just an issue for households but also a broader concern for economic stability. The Fed's decisions on inflation control and interest rates will need to account for the significant strain faced by lower-income consumers. As the labor market cools, particularly in lower-wage sectors, policymakers must balance efforts to contain inflation with the potential damage to those already struggling financially. The risk of an overly restrictive monetary policy could disproportionately harm the most vulnerable segments of the population, making it more difficult for lower-income consumers to maintain their standard of living. In this context, the Federal Reserve’s approach to inflation and interest rates will play a crucial role in shaping the future economic landscape for both high- and low-income households.

bottom of page