The impact of inflation on low- and middle-income Americans since last year

Putting the “fun” back into the budgets of low- and middle-income Americans may be years away with most of their incomes covering a surge in spending on bare necessities, economists said.

Even with annual inflation cooling last month to its lowest level since February 2021 and wages growing faster than inflation, low- and middle-income Americans are covering their essentials, including groceries, shelter, utilities and gasoline, economists say.

Because when inflation slows down, it means that prices aren't rising as fast, prices aren't falling. Hence, Americans tend to pay higher prices for daily necessities.

Low- and middle-income Americans were disproportionately hit compared to their higher-income peers because necessities account for a larger portion of their budgets, and their discretionary spending, or spending on nonessential items like dining out, vacations and entertainment, is only recovering, economists say.

“For a very large portion of Americans, the bottom 60% are spending more on essentials than before the pandemic,” said Michael Pearce, deputy chief US economist at Oxford Economics. “The burden is hardest among the low income but also touches the middle income. It will take years for low-income Americans to recover their spending patterns.

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'No financial progress'

According to the monthly Primerica Household Budget Index (HBI), the purchasing power of middle-income Americans, after falling sharply in 2021-2022 inflation shocks, recently moved above 2019 levels. The HBI assesses whether households can move ahead or fall behind financially based on changes in their earned income and the affordability of daily necessities needed to run their household.

HBI was 102.2% in August, up from a low of 86.7% in June 2022 when inflation hit a 40-year high of 9.1% and the highest level since February 2021. Families are neither better nor worse than them January 2019 was when the HBI was 100%, so August's reading means middle-income Americans are doing slightly better than in 2019 and much better than when they were underwater in 2022.

However, “without a wave of inflation, the HBI would be around 112.5%,” said Amy Kruse Cutts, an economic consultant at Primerica. “This difference explains a lot about the low consumer sentiment that, while conditions have improved, households have made almost no financial progress in 5.5 years of hard work.”

A Gallup poll this month showed that 52% of Americans say they and their families are worse off today than they were four years ago. “Inflation likely underpins Americans' perception that the economy is weak, even against a backdrop of generally low unemployment, steady economic growth and record stock and housing prices,” it said.

How many years will it take to return to normal?

That depends on wage growth and whether the price of essentials like gas or rent will drop, Pierce said.

The last time discretionary spending by low-income Americans fell so much, which was during the global financial crisis of 2007-2008, it took five to 10 years for spending patterns to return to previous levels, he said.

“And the reason was the drop in gas prices,” Pierce said. Global oil prices fell nearly 70% between 2014-16, sharply lowering pump prices and helping lower-income Americans catch up.

“It's hard to see (such) revolutionary cost savings on the horizon,” he said.

Sales and Conduct

Krista Engel, 58, continues to be a financial mess

To cope with sharply higher prices, Engel, a manager at a Dunkin' store in Chicago, said she and her husband not only cut back on “treats,” but also bought whatever they could on sale.

“For me, since we have two incomes, it's not that bad,” she said. “I try to sell as much as possible… like crackers, frozen pizza. We need to cut down on eating out and unnecessary small treats.”

Money for essentials must come from somewhere, so people “have fun, not saving or spending some of their savings,” Cutts said. “Inflation has blown their budgets. I'm sad because this is a boom economy, and we want to see people's economic standard of living increase because people have jobs, grow, and companies are doing well. What we see is a lot of weakness. It shows how strong inflation is.”

Air conditioning, watering the garden and visiting family were “luxuries” Amy Aroin, 63, passed up last summer.

“We didn't use central air this year as much as we have in the past to keep the bill down,” said Aaron, who is married and lives in Beloit, Wisconsin. “We were careful when watering the garden so we could keep the water bill down… It (also) costs about $50 to visit my family who are only 1.5 hours or two and three hours away. I think because of the economy we travel less and see less family.”

Will the upcoming vacation affect spending?

Low- and middle-income consumers will likely still find bargains this holiday season, analysts said.

“We're seeing the impact of inflation on middle-class consumers,” said Adam Davis, managing director of Wells Fargo Retail Finance. “Discretionary spending on big-ticket items has decreased, which may indicate tightening holiday budgets, and some consumers may also bargain on items, with many actively looking for bargains.”

Arron says that through belt-tightening during the year, “we've somehow managed to keep a budget that probably won't affect our upcoming vacation too much. We have 11 grandchildren and usually spend $25 to $30 for each of them. And we will probably be as good as this year. We may have to use a credit card though.”

And “yes, we will definitely visit the family during the holidays,” he said. “But sometimes not as much.”

Medora Lee is a money, markets and personal finance reporter at USA Today. You can contact him at mjlee@usatoday.com and subscribe to our free daily money newsletter for personal finance tips and business news every Monday through Friday morning.