"Greedflation," "upflation," and the ongoing political turmoil are all contributing to the financial strain we are feeling.
There’s a growing split between the “have” and the “have-less” classes in America. This split is affecting how middle—and lower-income Americans spend and how they feel about the economy overall. As some experts note, we’re looking at a “two-speed” economy in which rich Americans spend lavishly while those with less means begin to cut back.
“Things that lower-income consumers need to buy, like food, gas, rent, all those things are up a lot from where they were just a few years ago,” Mark Zandi, the chief economist at Moody’s Analytics, told Observer. “Rent and food are up 20 percent to 25 percent from three years ago. These are things that lower-income households have to buy, and they don’t have a whole lot of financial resources to buy them. So the combination of paying more for things and not having a whole lot of savings makes for a tough financial situation.”
Americans with lower incomes are starting to feel the pressure, as recent data shows that auto and credit card delinquencies have increased. According to the most recent data from the Federal Reserve, Americans added $11.3 billion to their debt load in May in the form of auto, credit card and student loan debt. The increase surprised economists because it nearly doubled April’s $6.5 billion. As the Fed continues to hold interest rates at historical highs, payments on those debts have ballooned, putting many into a tough spot. Loan delinquencies over 90 days past due are the highest they have been in more than a decade. In addition to all this, lower-income households have been shut out of both the housing market and the stock market thanks to their astronomical rise over the last year. Both the housing and the stock market runs have made richer Americans even richer, widening the gap.
“Back when inflation was raging, lower middle-income folks borrowed aggressively against credit cards. They took on a lot of consumer loans and so-called ‘buy now, pay-later’ loans,” Zandi said. “Interest rates have risen so much since then. That’s now created a real problem for these households, and they’re paying a lot more on those cards and consumer financials, resulting in higher delinquency.”
That economic pinch is affecting the population’s feelings about the economy and impacting inflation, according to the most recent data from the University of Michigan, which measures consumer sentiment. “Nearly half of consumers still object to the impact of high prices, even as they expect inflation to continue moderating in the years ahead,” wrote Joanne Hsu, director of the surveys of consumers at the Institute for Social Research at the University of Michigan. “With the upcoming election, consumers perceived substantial uncertainty in the trajectory of the economy, though there is little evidence that the first presidential debate altered their economic views.”
“Greedflation” (also known as “shrinkflation”), which describes a practice where corporations raise the prices of goods and services while providing less, has been a hot topic over the last few years. Corporations hiked prices during the pandemic citing supply chain issues and shortages, and high prices have largely stuck. They’re taking a toll on consumer confidence and inflation.
Also at play is “upflation,” where companies try to find new uses for older products and charge more. It’s causing consumers to search for alternative, cheaper, non-brand name products.
“Businesses have been able to raise prices more aggressively, but costs have risen so that that has added to the inflation that we’ve all suffered over the last few years, but profit margins have effectively gone flat,” Moody’s Zandi said.
It’s not all bad news, though. Retail sales were essentially flat in June compared to the previous month, according to the Commerce Department’s latest report released this week. However, when auto sales and gas were excluded, retail spending increased by 0.8 percent. The cyberattack that crippled auto dealers across the nation in June impacted retail sales overall.
The good news is that everyone has a job. The unemployment rate is still meager, and wage growth remains strong, particularly for low-wage workers. In addition, inflation is cooling. However, lower-income consumers aren’t out of the woods yet, particularly in light of the political violence over the weekend and questions about what the Fed might do in the fall, Zandi warned.
“The Fed may not cut rates, which I think would be a mistake,” he said. “It could impact the financial system and banks’ ability to extend credit. It could impact the labor market, which is already showing signs of strain. It really goes back to what’s going on in this election and how that all plays out.”
