How Economic Inequality Is Impacting Consumer Spending

Ever thought about how the rich and the poor affect our spending? The growing gap between the wealthy and the poor changes how we spend our money. This change affects the whole economy. Let’s explore how this divide impacts our spending and why it’s important for all of us.

Key Takeaways

• In 2018, the top 1% in the U.S. secured 16.4% of the income, up from 8.9% in 1979.
• The top 1% were saving 30.6% of their income, vastly outpacing lower-income households.
• Rising inequality has reduced growth in aggregate demand by about 1.5% of GDP annually.
• While productivity rose nearly 60% from 1979 to 2019, hourly pay for nonsupervisory workers increased less than 14%.
• The highest income quintile accounted for over 80% of the rise in household income from 2008-2012.
• Consumption of luxury goods has increased, particularly for the highest income quintile.
• Price inflation for consumer goods rose at an average rate of 2.4% annually from 1984, impacting lower income households more significantly.

The Rise of Economic Inequality

The past few decades have seen a big rise in economic inequality. This change has deeply affected how we live together. Income gaps and wealth differences have grown, mainly because of globalization and new technologies. These changes have made it harder for people to trust each other and feel part of a community.

Today, we see more people accepting big differences in income. This change has made us think differently about how we spend money. As Schröder pointed out in 2017, feeling unequal can make us doubt others and ourselves. It also makes us want to show off more.

Income gaps have slowed down how much money people spend in the U.S. The bottom 90 percent’s income share has dropped from about 70 percent in 1979 to around 60 percent by 2016. This means more money goes to the rich, slowing down how fast we spend.

When we compare ourselves to others, we often want to keep up. This desire for status can lead to buying things we don’t really need. The lost spending because of inequality is as big as the boost from big government programs, like the American Recovery and Reinvestment Act in 2010. In places with big income gaps, showing off is all about getting ahead and being respected.

In short, economic inequality has grown because of changes in how we earn money, not just taxes. The top 1 percent has gotten a big share of this money. The rise in after-tax and spending inequality shows it’s a long-term problem. Looking back at economic inequality helps us understand its big impact on our lives and how we spend.

Income Disparity and Household Finances

The income gap in the US is growing, affecting lower-income families a lot. The top 1% and 10% earners now have more income than ever before. In 1980, they had 10.5% and 34.2% of the income. By 2021, these numbers jumped to 18.8% and 45.5%.

Lower-income families have a hard time saving money because most of their income goes to basic needs. This makes it tough for them to spend on things they want. On the other hand, richer families can save more, which affects the economy.

Household spending in the US has grown, from 60% of GDP before the 1970s to 67.2% in 2020. This shows how important spending is for the economy. Wealth inequality is even bigger than income inequality, making it harder for lower-income families to buy things.

Richer families can invest and save, helping them grow their wealth. Poor families often have to borrow money to afford things. Every 1% increase in credit loans means a 0.1% rise in spending on goods and services. This shows how borrowing affects lower-income families.

The gap between income, consumption, and wealth is getting wider. The Panel Study of Income Dynamics (PSID) helps us understand this. It shows that while some families move up, wealth mostly stays with the rich. This limits the chances for lower-income families to improve their financial situation.

Changes in Consumer Behavior

In recent times, there’s been a big shift towards luxuries in how people spend money. This is because of growing economic inequality. Those with higher incomes are spending more on luxury items, even when times are tough. On the other hand, lower-income families spend most of their money on basic needs.

The Consumer Price Index (CPI) report shows prices have risen by 5.4% recently. This is the highest jump since the Great Recession in 2008. It highlights how spending habits are changing.

Economic pressures are making people spend more on things they want, rather than need. For example, despite inflation hitting 8.6% in March, the rich are still buying luxury goods. But, for lower-income families, rising costs for food, housing, and energy are a big burden.

The University of Michigan’s Index of Consumer Sentiment (ICS) dropped to 59.4 in March. This is the lowest in over a decade. It shows how worried and uncertain many people are. Food prices rose by 8.8% and energy costs by 32% in March, adding to the financial stress, especially for those with lower incomes.

The trend of spending on luxuries is mainly seen in higher-income households. This is true even when the economy is not doing well. It shows how the rich are less affected by financial troubles than the poor. Understanding these changes is key for those making policies and running businesses.

Purchasing Power and Economic Growth

Purchasing power is key to economic growth. Rising inequality hurts purchasing power, mainly by giving more money to the rich. This leads to *reduced aggregate demand* and slows down the economy.

In the United States, the Consumer Price Index (CPI) tracks changes in what we can buy. The U.S. Bureau of Labor Statistics (BLS) updates this information regularly. This helps us understand how our money goes further.

Worldwide, Purchasing Power Parity (PPP) helps us see how costs of living differ. The World Bank’s International Comparison Program gives us data on PPP. This data helps us understand global economic trends.

Inflation erodes our purchasing power by making things more expensive. High inflation can lead to higher living costs and affect global markets. It can even cause economic crises.

Investments like Treasury Inflation-Protected Securities (TIPS) can protect against inflation. So can commodities like oil and metals.

A research paper by Andreas Bergh and Therese Nilsson explores income inequality and purchasing power. It shows that higher inequality can sometimes help the poor buy more.

In Ethiopia, inflation is a big problem. The inflation rate hit 33.8% in the 2021/22 fiscal year. This is much higher than the previous year and the sub-Saharan average.

Strategic macroeconomic policies are needed to protect purchasing power. Understanding the link between *reduced aggregate demand* and economic growth is vital. This knowledge helps create effective policies for sustainable economic growth.

How Economic Inequality Is Impacting Consumer Spending

Economic inequality affects how people spend money, especially when looking at spending patterns across income quintiles. It shows how status and materialism play big roles in today’s economy. For example, the rich spend more on things that show off their status, which shapes market trends and consumer culture.

This is called status consumption and is driven by wanting to compare oneself to others. It’s more common in places where there’s a big gap between rich and poor.

Looking at how both the rich and the poor spend money, we see clear differences. The rich tend to buy more status symbols, setting the standard for others. Meanwhile, the poor have less money to spend, which affects their ability to buy things and impacts overall demand.

Here’s a table that shows some key spending habits and their effects across different income levels:

Also, spending patterns across income quintiles reveal a bigger issue: financial insecurity for the poor. They might take on debt to keep up with the rich. This not only hurts their personal finances but also affects the whole economy.

Socioeconomic Factors Affecting Consumer Confidence

Consumer confidence is linked to many socioeconomic factors. One big factor is Status Anxiety. This is when people compare themselves to others, changing how they spend money. Both rich and poor people buy things to show off their status.

This Social Comparison can really affect what people buy. It makes them choose expensive items, even if it’s hard on their wallets.

Inflation also affects consumer confidence, especially for families with different incomes. Poor families spend most of their money on basic needs like food and shelter. Rich families, on the other hand, can afford to buy things like cars and jewelry, which change with the economy.

When people are unsure about their income, they save more. The U.S. Federal Reserve aims for an inflation rate of 2%. But, higher interest rates to fight inflation can make borrowing costlier, hurting consumer confidence.

Many things influence how much people spend. The Bureau of Economic Analysis (BEA) tracks this through the personal consumption expenditures (PCE) indicator. When the economy is strong, with good jobs and low interest rates, people spend more. But, during tough times, they save more, spending less.

Consumer sentiment is key in tough economic times. Different groups, like those with less education or lower incomes, tend to be less optimistic. Changes in consumer sentiment often signal big economic shifts. Income, wealth, job rates, stock market, and inflation all shape how confident people are about spending.

Discretionary Spending and Debt

High levels of discretionary spending often lead to consumer debt. This is especially true for buying luxury items like fancy cars and designer clothes. People want to show off their wealth, which can be a problem during tough economic times.

When local job rates hit new highs, people’s spending habits change. For example, they cut back on non-essential spending by 2% soon after hearing the news. Over time, this can add up to a 5% reduction in spending. Also, paying off credit card debt becomes harder, with a 3.6% drop in payments after job rates peak.

It’s important to understand how local economic conditions affect spending. Here are some key statistics and trends:

The pandemic has greatly affected how people spend money. Discretionary service spending fell by about 30% during the COVID-19 recession. This is a bigger drop than during the Great Recession. Health care spending also dropped by over 35% between February and April, mainly because some offices closed.

Consumer behavior during economic downturns shows how complex debt and spending can be. People face challenges balancing their desire to show off their wealth and managing their debt. This balance is crucial in understanding how people spend money.

Conclusion

Economic inequality and its effects on spending are complex issues. Over the years, income gaps have widened. By 2018, the top 1% earned 16.4% of income before taxes, up from 1979’s 8.2%.

This rise in inequality changes how people spend money. Lower-income families spend less, affecting overall demand. This has cut GDP growth by about 1.5% each year, sometimes more.

Higher-income families save more, taking money out of the economy. This makes it harder for the economy to grow. To fix this, we need better policies.

We need more taxes for the rich and better social support. These steps can help reduce inequality’s negative effects. They create a better environment for everyone to grow economically.

Source Links

• Inequality’s drag on aggregate demand: The macroeconomic and fiscal effects of rising income shares of the rich
• ec 201418 income inequality and income class consumption patterns
• Frontiers | Economic Inequality Increases the Preference for Status Consumption
• Inequality is slowing U.S. economic growth: Faster wage growth for low- and middle-wage workers is the solution
• Consumption and Income Inequality since the 1960s
• Income Inequality, Household Debt, and Consumption Growth in the United States
• Inequality and Mobility using Income, Consumption, and Wealth for the Same Individuals
• How consumer perceptions can affect the economy
• Amid a recovery, consumers face off against inflation
• Understanding Purchasing Power and the Consumer Price Index
• PDF
• Nexus between inflation, income inequality, and economic growth in Ethiopia
• Megatrends – The Future of Work for the 50+: What does rising income inequality mean for the future of work?
• Causes and Consequences of Income Inequality – An Overview
• Which Economic Factors Most Affect the Demand for Consumer Goods?
• Trends in Consumer Sentiment and Spending
• Consumer Spending and Jobless Data: a Peculiar Threshold – UCLA Anderson Review
• Discretionary and Nondiscretionary Services Expenditures during the COVID-19 Recession – Liberty Street Economics
• Household Spending Patterns and Hardships during COVID-19: A Comparative Study of the U.S. and Israel
• Causes and Consequences of Income Inequality – An Overview