For a household earning more than $125,000 a year, the last few years have been characterized by an increase in wealth. Portfolios have expanded, and retail spending has increased. But for a family earning a lower income, the economic situation differs. The gains of the post-pandemic labor market have been offset by an increase in the cost of living.
This divergence is what economists call a K-shaped economy. Rather than a broad-based recovery where all boats rise, the economy has split. One prong of the K trends upward, powered by asset appreciation; the other trends downward, influenced by the rising cost of essential goods.
The 2023 Pivot: Where the Economy Split
The K-shaped pattern did not emerge overnight, nor was it a feature of the immediate post-pandemic recovery. According to research from the New York Fed, the trend took hold in 2023. This shift occurred as the subsidies and benefits that supported lower- and middle-income households during the pandemic began to fade.
To track this, researchers analyzed a panel of 200,000 respondents, dividing them into three distinct tiers: low income, middle income, and high income (more than $125,000). The findings show that while nominal spending rose across the board, the real-term growth—adjusted for inflation—was not shared.
“only the high-income group consistently” showed “real spending growth over this period.” New York Fed researchers
For the middle and lower tiers, spending failed to keep pace with the cost of goods. This suggests that the aggregate growth often cited in national economic reports may mask dependence and conceal macroeconomic risks, as it is being driven by a relatively small segment of the population, potentially hiding a broader fragility in the consumer base.
Essential Inflation as a Budget Breaker
The downward prong of the K is fueled by a phenomenon known as asymmetric inflation. While the national inflation rate is a useful average, it does not reflect the actual costs experienced by different income brackets. Lower earners spend a larger share of their income on essentials, making them more vulnerable to price spikes in categories like energy and food.
Gasoline has become a primary driver of this instability. In March, gas prices rose 18.9% year over year, the sharpest increase since August 2022. The impact is not felt equally. Bureau of Labor Statistics data from 2024 reveals a stark gap in budget allocation: the lowest 10% of consumer units spent 3.5% of their total budget on gas, compared to just 1.9% for the highest 10%.
These factors contribute to a difficult financial environment. As essential costs rise, lower earners have fewer options to absorb the shock. The Bank of America Institute noted that higher gasoline prices are stretching household budgets, with the most severe impact hitting low-income groups.
“Some consumers can cushion higher fuel costs through wage growth or increased use of credit, but this flexibility is more limited for lower-income households, which have the most stretched credit card utilization rates relative to 2019” Bank of America Institute
This lack of a financial cushion means that for the lowest earners, inflation is not just a statistic—it is a direct constraint on their ability to purchase other necessities.
Financial Assets Fuel the Top Prong
While inflation acts as a tax on the poor, the stock market has acted as an engine for the wealthy. The S&P 500 has nearly doubled since the start of 2023, a rally that disproportionately benefits those who own equities.
High-income households typically hold a significantly larger share of financial assets. This has led to a divergence in real net worth—the total value of assets minus debts. The New York Fed found that since 2023, the top 1% of earners saw their real net worth grow by 30%.
In contrast, the bottom 20% of earners saw their real net worth grow by only 13%. While this was slightly better than the growth seen by the middle 40%, it pales in comparison to the gains at the top. The researchers attributed this gap to large increases in financial assets for higher-income groups.
This creates a self-reinforcing cycle. Wealth generates more wealth through dividends and capital gains, which in turn fuels the retail spending growth observed in the high-income bracket. This wealth effect allows the top prong of the K to move upward even when the broader economy feels stagnant.
Credit Limits and the Fragility of Growth
The current economic structure raises a critical question about the sustainability of U.S. consumer spending. Because growth is now so heavily reliant on the high-income segment, the economy has become more vulnerable to specific shocks.
For lower earners, the path back up the K is obstructed. Although some experienced higher wage growth during parts of 2023 and 2024, they have since faced the worst wage growth of any income group over the past year. With credit card utilization already stretched to its limit relative to 2019 levels, there is little room left to borrow against future earnings to cover current costs.
The New York Fed researchers warned that this imbalance raises questions about the fragility of the current growth model. If the stock market were to undergo a significant correction, the primary engine of retail spending growth could stall. Since the lower and middle tiers are already struggling to maintain real spending, they cannot step in to fill the gap.
“Reliance on a single segment of the economy has important implications for spending growth and its fragility, as well as for economic vulnerability and policy” New York Fed researchers
The result is an economy where the top and bottom are moving in opposite directions, not because of a lack of aggregate growth, but because of a fundamental difference in how that growth is distributed and how inflation is felt.
