Policy- The bottom 20% of American workers are devoting 80% of expenditures to essential goods like food.
- Comparably, only 55% of expenditures go to essential goods for the highest income quintile.
The rising cost of food, housing, transportation, and other essentials is impacting low-to-middle income Americans the hardest.
A J.P. Morgan research note took a look at spending patterns on essential goods. Overall, the "Big 5" spending categories defined as housing, food, gas, utilities, and health care, accounts for 65% of US consumers' household expenditures, the note said. However, for the lowest quintile of Americans, who earn less than $26,000 a year, over 80% of their expenditures are spent on rent, groceries, healthcare, and commuting.
Comparably, the "Big 5" makes up just 55% of expenditures for the highest income quintile, who are making over $140,000, according to the Bureau of Labor Statistics.
And these values are expected to grow next year as inflation remains stubbornly above the Fed's 2% target. September's Consumer Price Index came in at 3.7% for the second month in a row, and prices for housing, food away from home, personal care products, and other essentials are inflating faster than average CPI.
Next year, J.P. Morgan anticipates 80.7% of expenditures for the lowest income quintile will be on the "Big 5." It's also expected to rise slightly to 55.7% for the highest income quintile.
That comes even as real wages are growing faster for lower-income Americans than those with higher incomes. Workers in the bottom 10% of the income distribution saw real wages grow 9% between 2019 and 2022, a March report by the Economic Policy Institute found.
A Dallas Fed report from August 2022 found that the lowest-income workers saw accelerated earnings growth during the pandemic — for the bottom quartile, nominal earnings grew 7.2% from the last quarter of 2019 to the last quarter of 2020, compared to just 3.4% for high-earning workers over the same period. The next year, nominal earnings for the bottom quarter increased 7.7%, while high-earning workers saw nominal earnings growth of 3.6%.
One would think that because poorer Americans are getting higher wages, they'd be spending less of their money on these core items. But even as lower-income Americans continue to see wage growth outpace inflation, it's not helping them as much as some believed it would.
Salary increases are not keeping up with the cost of living increases, J.P. Morgan found. In fact, 59% of low-income consumers reported not receiving a salary increase, compared with 34% of high-income consumers. For those receiving salary increases, sentiment hasn't improved — under 10% of those with a salary increase noted it offset the increased cost of these "Big 5" goods, J.P. Morgan found.
For instance, though food costs are on the whole on par with overall CPI, items such as meats and sweets are inflating fast. Food away from home, including restaurants, is up 6.0% year-over-year. Personal care products including hair, dental, shaving, and others are up 7.2% year-over-year, nearly double the rate of inflation.
Housing costs are also elevated, as "the index for shelter was the largest contributor to the monthly all items increase, accounting for over half of the increase," the Bureau of Labor Statistics said in a news release. Gas costs, also contributed to the rise in core CPI.
This means that until the prices of housing, gas, and food go down or at least see a big slowdown in growth, inflation will continue to eat away at Americans' paychecks. This is especially true when the US personal savings rate is also falling — although the US does indeed have a larger safety net than many thought.
Additionally, credit card debt is rising, while nearly half of Americans expect to cut their discretionary spending over the next 12 months, according to J.P. Morgan. While most Americans who received salary raises did increase their discretionary spending, Americans are cautious about navigating the economy.
Given that lower-income Americans are on the whole hurting for cash, this data suggests Americans are bracing up for more economic pain in the coming months. A recession, which many economists believe could come by the first or second quarter of 2024, could further exacerbate income inequality.
A recession could also increase the country's racial gap, as Black and Hispanic Americans experienced a rapid reversal of cash buffer gains over the last few years. Even despite relative income gains of Black and Hispanic Americans over the last few years, the racial gap is still growing.
Despite a growing number of economists who say the Fed is done raising interest rates — and that a recession is less likely — America's lower-income residents are not expected to get major economic relief anytime soon.