US inflation climbed in May, driven by increased consumer spending. This rise in prices has disproportionately affected lower-income households, who allocate a larger share of their income to essential goods and services such as housing, utilities, and groceries. While inflation has generally slowed, the costs of these necessities continue to rise, making it difficult for many Americans to maintain their standard of living.
Despite an aggregate rise in wages, with weekly pay increasing 31% over the past six years, the gains have not always kept pace with the climbing costs of essentials. Consumers now pay approximately $126 for items that cost $100 before the pandemic, leaving many feeling financially squeezed and struggling to get ahead. Delinquency rates have reached their highest in almost a decade, indicating the financial strain on households.
Lower-income households have experienced the steepest price growth, both over the past year and cumulatively since the start of 2020. Households in the second-lowest income quintile have seen their cost of living rise by 23.7%, closely followed by those in the bottom and middle quintiles (23.2% each). This is largely due to outsized increases in housing, electricity, and food. These households also confront less flexibility in adjusting to higher prices due to limited savings and a greater reliance on essential purchases, which are harder to cut back on.
While real income gains were observed for lower-income households during the initial two years of the pandemic, these improvements have recently eroded. This is attributed to weaker nominal income growth and a higher rate of inflation impacting this demographic. The persistent high inflation also concerns the Federal Reserve, which may need to maintain higher interest rates.
