Middle-Income Households Hit Hardest by Inflation

Inflation is often said to be a tax on the poor, but this time it seems to have hit middle-income households the hardest. This is likely due to the rising cost of living, which is putting a strain on many families. It's important to remember that inflation can affect everyone, not just those on the lower end of the income scale.

According to studies by the Congressional Budget Office and others, many low-income households have benefited from exceptionally low unemployment rates, and have found jobs with wage increases that have lifted their incomes more than the cost of living. Many of these households have also been bolstered by federal payments during the pandemic.

Many high-end households have seen significant losses in stock and bond markets, but their income and savings have been sufficient to allow them to continue spending aggressively.

The middle class is being squeezed. Purchasing power from paychecks fell 2.9% for middle-income households in 2022 compared to 2021, while rising 1.5% for the bottom fifth of households and 1.1% for the top, according to the CBO study. A growing share of middle-income households say they are having more trouble making ends meet, according to Census Bureau surveys.

According to the Census Bureau, the median household income in 2021 was $70,784.

Jessica DeCicco, 43, is a mother of four who also works from home as an executive assistant at a local marketing company. She earns $30 an hour for her work. Meanwhile, her husband Vinny is a sergeant in a New Jersey police department and brings in an annual salary of $125,000.

The family's income is enough to cover the cost of a home, appliances, and two cars in their suburb of Long Valley, New Jersey. However, they feel stretched financially when it comes to covering the cost of daily staples like groceries.

The DeCiccos' water bill has increased by $200 per quarter compared to last year, and their monthly electricity costs have gone up by about $100. Before the pandemic, they used to spend around $200 on groceries each week; on a recent trip, the bill came to $378. Ms. DeCicco is still buying organic milk for her children, but it now costs $40 per week for the four gallons they drink, up from $28 before.

Ms. DeCicco said that she is willing to splurge on one thing.

She is cutting back on expenses in other areas, including trimming and coloring her hair, and she recently dipped into her 401(k) to pay the $2,700 monthly mortgage. Her 14-year-old son, Dominic, asked relatives for money rather than gifts this Christmas so he can save up for a school band trip. Her 11-year-old daughter, Daniella, recently asked her mom for help setting up an account on Etsy, the marketplace for handmade items, so she could pitch in and earn some spending money by making and selling bracelets.

Renters and student borrowers were able to defer their payments during the pandemic, while many households benefited from federal relief checks. However, that aid is now winding down.

In Vermont, the cutoff for food stamp benefits is 185% of official federal poverty levels, a little over $51,000 a year. John Sayles, chief executive of the Vermont Foodbank, said he is seeing more families above that cutoff showing up for staples.

Mr. Sayles said that many of the people coming to food pantries are those who have never had to ask for assistance before. They don't qualify for federal programs, but they're still struggling to make ends meet. "These are families who are employed, that make what anyone would consider a very good salary, but they are having to make choices," he said.

Middle-income households have been especially exposed in the past two years, as the prices of goods and services they typically purchase, such as cars and gasoline, have risen sharply.

Xavier Jaravel, an associate economics professor at the London School of Economics, found that middle-income households experienced inflation well over 15% from 2020 to 2022, compared with 14% and lower for the highest- and lowest-income households. That is mainly because of the middle class's exposure to cars and gasoline, where price increases were especially pronounced. In earlier cycles, low-income households tended to experience higher inflation.

The share of middle-income households who said they were worse off dropped toward levels close to those of low-income households in 2022, according to a University of Michigan survey. This is in contrast to 2020, when their confidence was near the levels of high-income households. When asked for the source of financial problems, middle-income households were most likely to cite inflation.

It's no surprise that low-income households have a harder time making ends meet than middle- or high-income households. They have less income and fewer assets to start with, so even though they haven't been hit as hard by the current economic conditions, they're still at a disadvantage.

Low-income households are especially vulnerable to economic shocks and rising unemployment. Without many financial resources in the form of savings, these households are quickly strained when faced with unexpected costs. This leaves them at a disadvantage as they enter 2023.

The good news is that inflation appears to be slowing down. If this trend continues into 2023, some of the pressure might be relieved. In November, the consumer-price index was up 7.1% from the previous year, compared to a 9% increase in June. Gasoline prices have been falling in recent months, though groceries are still rising at a fast pace.

As middle-income households adjust their spending habits, businesses are moving to adapt. Executives from various industries say that sales have remained robust in high-end categories, such as luxury jewelry, but that consumers in the middle are pulling back or trading down to more affordable products. This shift in spending habits among middle-income consumers is forcing businesses to change their strategies in order to stay afloat.

In recent months, executives at Urban Outfitters, Kimberly Clarke, Procter and Gamble, Victoria's Secret and other companies have talked about a bifurcation in demand in conference calls with analysts.

Urban Outfitters has seen strong demand at its trendy Anthropologie clothing stores and Nuuly clothing rentals, which offer higher price points to more affluent customers. Customers at its Urban Outfitters stores tend to be younger with less discretionary income, and they’re pinching pennies.

Macy's has seen an increase in demand for both low- and high-priced items. A cubic zirconia earring and necklace set on sale for $25 has been selling well, as have diamond tennis bracelets.

Bahram Akradi, chairman and CEO of Life Time gyms, said in an interview that he isn't worried about the long-term impact of inflation on his business. "If everything costs 30% more, we charge 30% more," he said. "Our customer is someone who wants the best experience and will find a way to pay for it." Life Time gyms memberships are $259 a month in Manhattan.

At the same time that some households are trading down to Planet Fitness's $10-a-month memberships, the chain's total revenue is up 58%. In the third quarter, 29 new locations opened.

Budget cosmetics brand e.l.f. is seeing record growth, fueled in part by middle-income consumers trading down from luxury products. The drugstore brand grew 33% in the third quarter, according to Chief Executive Tarang Amin.

Mr. Amin said that many consumers are now looking for products that compare to "prestige quality" items, rather than just lower-priced items. One example of this is the halo-glow liquid filter, which is priced at $14. This is on the high end of the company's price spectrum. A popular product on the low end is the $3 Srsly Satin Lipstick. The company said it has kept the price of this and other items in the $2 to $4 range the same, while raising prices on more expensive items due to inflation.

Boost Mobile was created in 2001 to provide affordable wireless service to low-income consumers. Stephen Stokols, EVP of Retail Wireless at Dish Network, said that Boost is aimed at customers making about $50,000 a year. With pay-as-you-go plans from $10 to $25 a month, Boost offers an affordable option for those who need it most.

Dish Network launched a test version of Boost Infinite on December 7, which charges $25 a month for unlimited data. This is a play for consumers making $100,000 a year. Dish executives started talking about the possibility of this service at the beginning of 2022. According to Dish Network CEO, Erik Stokols, "At the height of the market they might have been less price-conscious, but now they are extremely price conscious."

We're targeting value-centric customers on AT&T and Verizon. These customers tend to have better credit and can pay at the end of the billing cycle instead of the beginning.

The company said the response to its new product has been more positive than expected. “It’s big numbers on what we expected to be a very quiet beta,” Mr. Stokols said. The company isn’t sharing numbers yet, but the early feedback is encouraging.

Data suggests that the lowest-income households have fared relatively well in the economy. Many firms have offered jobs and pushed up wages for these workers, helping to offset inflation.

According to David Autor, an economics professor at the Massachusetts Institute of Technology, the bottom 15% of the wage distribution has seen real wage gains even over the last year. This is based on his recent work on wage gains across different income levels.

Mr. Jaravel of the London School of Economics noted that because low-income households tend to use more public transportation, they haven’t been as exposed as others to rising car and gas prices. He added that this could help explain why low-income households have been less affected by the recent rise in fuel costs.

There may be some relief from inflationary pressures in the near future, but other risks remain.

The Federal Reserve has increased short-term interest rates in an effort to reduce borrowing, spending and investing, which helped to ignite inflation with excess demand. Fed officials expect the inflation rate to decrease to near 3% in 2023 and then lower in 2024 and beyond. Prices for household items including furniture and appliances, in addition to new and used cars, have shown signs of easing.

The cost of inflation relief is projected to be a slower growing economy and higher unemployment. Fed officials project the jobless rate will rise from 3.7% in November to 4.6% by the end of 2023. More private economists say recession looms, with unemployment even higher than Fed officials foresee.

Weakening job markets have a disproportionate impact on low-income workers, who are often the first to be fired during a downturn. This can have a ripple effect, causing hardship for middle-income households as well.

There has been an increase in layoffs in the tech sector.

Morgan Suazo, 28, and her husband moved from Oklahoma City to Orlando, Fla., in early 2021. She was a human resources officer for a small tech company earning $69,000 a year and he was a content moderator earning $16 an hour. They bought a modest home, hoping to start a family and enjoy the occasional $1,500 weekend cruise.

The couple is excited to start their new life in Florida and are looking forward to all the opportunities that come with it. They are grateful to have a stable income and a comfortable place to call home.

After moving to Orlando, they found that their paychecks didn't go as far as they used to. Then, in late July, he lost his job. This month, she lost her job as well.

The couple is using their savings to pay their mortgage, and cutting back on small luxuries like weekly date nights and their morning Starbucks orders. “We definitely aren’t going on any cruises anytime soon,” Ms. Suazo said.

The couple estimates that they have saved enough money to cover about six months of expenses, thanks in part to federal pandemic relief payments. However, they are worried about finding new jobs in the tech industry, where they had long wanted to pursue careers.

"We're not asking for the moon and the stars," said Ms. Suazo. She said she isn't hoping to one day buy a Lamborghini. "We just want groceries and a roof over our heads - that's all people our age want."