Lower income consumers are getting squeezed and it’s likely to get worse.
Working-class Americans are facing slowing wage growth and rising housing and electricity bills. And they’re about to feel more pressure from tariffs and from higher healthcare costs as a result of the recently passed Republican spending plan.
Gas and electricity bills spiked in August, according to the latest CPI (consumer price index) inflation report, increasing at 13.8 and 6.2% annual rates, respectively. Rising housing costs–known outside government statistics as rent–are climbing, which hits lower income consumers especially hard. The poorest 20% of consumers devote about 40% of their income to housing, whereas the richest 20% typically spend less than 30%. President Donald Trump’s big spending bill included cuts to food assistance and Medicare payments to states, which are likely to result in states reducing funding levels for healthcare.
As a result, according to a new report from Moody’s Ratings, lower income consumers are increasingly dipping into their savings, adding to debt, and pulling back on discretionary spending. Savings are 22% below pre-pandemic levels, according to the Moody’s report
Middle- and upper-income consumers have felt the “wealth effect” of a rising stock market. But even they have been looking to cut spending by using strategies such as buying in bulk, switching to private brands, and shopping at cheaper retailers, Mickey Chadha, a Moody’s retail analyst and vice president, told the Washington Post. Walmart, Dollar General and Dollar Tree have told investors that they’ve picked up share among wealthier consumers looking for bargains. Sales in the luxury sector seem to be feeling pressure as consumers start to resist price increases.
The consumer economy is increasingly dependent on high income consumes. The top 10% of earners—-making $250,000 or more annually–accounted for 49.2% of spending in the second quarter, according to Moody’s Analytics. That’s up from 45.8% during the same period two years ago.
That’s a relatively small shift but it’s been showing up more frequently in corporate financial projections.
PepsiCo, Kimberly-Clark and Procter & Gamble have all cut their earnings guidance as tariffs cut into their margins and consumers replace their brands with cheaper store labels. Chipotle, IHOP, Applebee’s and Sweetgreen have noted that their customers are pulling back. “I think it’s pretty obvious that the consumer is not in a great place overall,” Sweetgreen co-founder and chief executive Jonathan Neiman said last month in an earnings call. The U.S. Census Bureau’s August retail sales report released last week showed that once corrected for inflation, year over year retail sales year-on-year didn’t grew in the month. Unit sales were flat or down depending on the category, falling about 3% year-on-year.
The squeeze looks likely to get worse. Grocery inflation hit a two-year high in August, increasing 0.6% month-over-month. Tariffs are also causing price hikes in apparel, toys, appliances, and furniture. And for consumers with college loans, repayments resumed earlier this year.
The full effects of any slowdown in spending by this cohort of consumers may not show up until 2026. Consumers at all income levels are usually reluctant to cut back on holiday spending, relying on credit cards to bridge the gap–if they can. Check the consumer debt numbers from the Federal Reserve to see if consumers are borrowing in December and therefore more likely to cut back on spending in January. And listen for more cuts to revenue and earnings guidance from companies during third quarter earnings reporting season in October and November.
