Restoring “fun” to the budgets of Americans with low to middle income might take a significant amount of time as their earnings are primarily consumed by the escalating costs of basic necessities, according to economic experts.
Despite a recent report showing inflation hitting its lowest rate since February 2021 and wages increasing at a rate that outpaces inflation, many Americans in the lower and middle income brackets are still just managing to cover their essential expenses such as food, housing, utilities, and fuel, economists note.
This is due to the fact that a deceleration in inflation does not imply a reduction in prices but rather a slower rate of price increases, meaning Americans are still faced with elevated costs for daily necessities.
Those with lower incomes have been disproportionately affected compared to their wealthier counterparts because a larger portion of their budget is dedicated to essentials. Their discretionary spending, which includes non-essentials like dining out, vacations, and entertainment, is only now starting to rebound, say economists.
“A significant portion of the population, the bottom 60%, are spending more on essentials than they did pre-pandemic,” explained Michael Pearce, deputy chief U.S. economist at Oxford Economics. “The impact is most severe on the lowest income groups but also affects the middle class. It will take years for the spending habits of low-income Americans to bounce back.”
Stagnant Financial Progress
The purchasing power of middle-income Americans, which sharply declined during the inflation spike of 2021-2022, has only recently surpassed levels seen in 2019, according to the monthly Primerica Household Budget Index (HBI). This index evaluates whether families are financially advancing or regressing based on the affordability of essential household items and changes in income.
As of August, the HBI stood at 102.2%, a rise from the June 2022 low of 86.7% when inflation reached a 40-year peak at 9.1%, marking the highest point since February 2021. Households are neither better nor worse off financially than they were in January 2019, when the HBI was at 100%. Therefore, the August figure indicates a slight improvement from 2019 and a significant recovery from 2022.
However, “if not for the inflation surge, the HBI would have been approximately 112.5%,” stated Amy Crews Cutts, an economic consultant for Primerica. She pointed out that this gap significantly contributes to the low consumer sentiment, revealing that despite improvements, households have made virtually no financial progress over 5.5 years of diligent work.
A recent Gallup poll indicated that 52% of Americans feel they and their families are worse off now than they were four years ago. “Inflation is likely the main factor driving Americans’ perceptions of a poor economy, despite generally low unemployment, steady economic growth, and record highs in stock and housing markets,” the poll suggested.
Timeline for Economic Recovery
The recovery timeline will depend on wage increases and whether essential costs, such as gasoline or rent, decrease, Pearce mentioned.
He recalled that after the last significant drop in discretionary spending by low-income Americans during the Global Financial Crisis of 2007-2008, it took between five to ten years for their spending habits to normalize.
“The catalyst then was the decrease in gas prices,” Pearce explained. Global oil prices plummeted by about 70% from 2014 to 2016, which significantly lowered pump prices and aided low-income Americans in catching up financially.
“It’s difficult to foresee a similar dramatic cost reduction happening soon,” he added.
Bargains and Essentials
Christa Engel, 58, is still trying to make ends meet financially.
Engel, a manager at a Dunkin’ store in Chicago, mentioned that she and her husband have reduced their spending on “extras” and continue to hunt for sales. “With our dual-income situation, it’s not too dire,” she said. “I always look for sales on items like crackers or frozen pizza. We’ve had to reduce dining out and cut down on small, non-essential treats.”
Money for essentials has to come from somewhere, leading people to “eliminate fun, avoid savings, or dip into their savings,” Cutts remarked. “Inflation has devastated their budgets. It’s disheartening because this should be a flourishing economy where we see improvements in people’s quality of life due to employment, pay raises, and successful businesses. Instead, we’re witnessing significant economic frailty, highlighting the potent impact of inflation.”
Last summer, Amy Aaroen, 63, had to forego what she considered “luxuries,” such as air conditioning, watering the garden, and visiting family.
“We didn’t use the central air as much this year to keep the electric bill low,” said Aaroen, a resident of Beloit, Wisconsin. “We were careful with watering the garden to manage the water bill… Traveling to see my family, who live between 1.5 and three hours away, costs me about $50. The economy has definitely reduced our family visits.”
Impact on Upcoming Holiday Expenditures
Analysts predict that low and middle-income consumers will continue to seek bargains during the upcoming holiday season.
“We are still observing the effects of inflation on middle-class consumers,” commented Adam Davis, managing director at Wells Fargo Retail Finance. “There’s a noticeable decline in discretionary spending on big-ticket items, suggesting tighter holiday budgets. Many consumers might opt for less expensive alternatives or actively search for deals.”
Aaroen mentioned that through budget tightening throughout the year, “we’ve managed to maintain a budget that likely won’t impact our upcoming holidays too much. We have 11 grandchildren and usually spend $25 to $30 on each. We will probably do the same this year, though we might have to use the credit card.”
“And yes, we’ll definitely see family for the holidays,” she added. “But not as often in between.”
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Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.