The Changing Shape of Our Economy: Rising Inflation and Soaring Stock Markets
There are two gloomy facts about our economy that are keeping it in a 'K' shape - wages for those earning less are being eaten away by inflation, and these individuals are also missing out on the spectacular performance of the stock market.
A recent study reveals how the American economy has gradually transformed into a 'K' shape, where those earning more are prospering or at least maintaining their economic status, while those earning less are experiencing a decline in their fortunes. This shift was noticed after the pandemic, when a strong job market and financial aids during the pandemic gave a boost to individuals earning the least. However, with the recent surge in inflation and the stock market's wild climb, it's unlikely that those earning less will be able to make their way up this economic 'K' anytime soon.
The Impact of Inflation on Lower Earners
After the pandemic, those earning less began to witness a rise in their wages. However, higher prices were silently waiting to reduce these wage increases.
According to a study, by the end of last year, households with low income consistently faced higher inflation than households with middle and high income. More specifically, households with the lowest income have encountered inflation above the national average, restricting their spending.
Recent oil shocks and traffic disruptions in key sea passages have negated any progress made on inflation, pushing it to the highest level since a few years back. Gas prices surged by 18.9% in March, the most significant increase since a couple of years ago.
Those earning less tend to spend a greater proportion of their income on gas; data showed 3.5% of spending was on gas last year for the lowest 10% of consumer units by income, compared to 1.9% for the highest 10%.
A study from a leading bank institute stated, "higher gasoline prices are putting a strain on household budgets," but are impacting lower-income households the most.
"Some consumers can absorb higher fuel costs through wage growth or increased use of credit, but this flexibility is more limited for lower-income households, which have the highest credit card utilization rates compared to a few years ago," the report explained.
The Stock Market and Higher Earners
What's driving the upper end of the 'K' is the booming stock market. The leading market index has nearly doubled since a couple of years ago. Those earning more tend to own a larger proportion of financial assets than those earning less, boosting their financial fortunes and net worths.
There's a clear 'K' shaped pattern in real net worth, which considers consumers' assets and wealth minus their debts. A report from the New York Federal Reserve found that the top 1% of earners saw their real net worth grow by 30% since a couple of years ago, while the bottom 20% saw just 13% growth, which was slightly better than the middle 40%. This is likely driven by spectacular — and unequal — growth in financial assets, which include holdings like equity, bonds, or crypto.
The Current State of the 'K'
In summary, the 'K' shape hasn't necessarily worsened this year — everyone is spending less and feeling the pinch a bit more. Instead, it's stuck in a steady state, rather than improving: We're in a 'K' freeze, and that's still a disadvantage for the lowest earners in America.