The U.S. economy is increasingly characterized by a split between its affluent spenders and the struggling rest, a gap that continues to widen amid sticky, rising inflation.
In the 21st century, consumer spending has continued to account for around two-thirds of all economic activity in the United States, but an increasingly large share of that spending is coming from a narrower group of wealthier households.
A new study by researchers at Bank of America found that the top 10 percent of earners do at least as much spending as the bottom 40 percent across all major spending categories. When it comes to discretionary items, however, researchers found that this group spends “almost as much as the bottom 70 percent combined.”
Affluent Consumers Propping up Spending
Inflation reached a three-year high in the Department of Labor’s latest report. And despite some signs of strength in the labor market, rapidly rising prices have coincided with an overall decline in consumer confidence to near all-time lows.
But consumer spending has remained robust despite these pressures, accelerating in May even as price increases reached their fastest pace since April 2023. To some, this indicated that the more affluent consumer was propping up a greater share of spending and keeping overall consumer expenditure figures afloat.
The Bank of America Institute has been one of many to note that discretionary spending growth is increasingly skewed toward higher-income households. And discretionary categories matter, the researchers wrote, because these are “among the clearest indicators of the health of consumer spending.”
“As long as affluent consumers keep opening their wallets, inflation could stay stubbornly sticky,” they added.
How Inflation Could Depend on America’s Big Spenders
With richer households accounting for an increasingly large share of discretionary spending—from restaurants and travel to luxury goods and entertainment—inflation is no longer being driven equally by all consumers. As a result, wealthier Americans’ behavior can have an outsized influence on overall demand.
This is symptomatic of the “K-shape” economists have observed developing in the economy, with richer Americans thriving and spending as lower-income households pull back. With caution among the latter group balanced by continued spending by higher-income households, demand is expected to remain elevated, reducing any pressure on businesses to lower prices and, in certain sectors, giving scope to raise them.
If wealthy Americans continue to spend despite higher interest rates and rising prices, inflation could prove more persistent than expected—even as many lower-income households struggle with affordability.
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Inflation Expected to Fall Amid Iran War Negotiations
In a speech following the central bank’s June interest rate decision, Federal Reserve Chair Kevin Warsh recognized that inflation was elevated in large part due to the “supply shocks” caused by the Iran war.
However, oil prices and domestic fuel costs, which drove much of the increases in recent inflation reports, have been dropping sharply in recent weeks amid negotiations between the U.S. and Iran and a recovery in flows out of the Strait of Hormuz.
Speaking at a European Central Bank Forum in Portugal last week, Warsh said that inflation “risks” and expectations “have come down,” though he reiterated the central bank’s long-term 2 percent target.
Contact Newsweek editors on this story: Dan Orton and Sam Wilson.