How Inflation Affects Different Households

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Each household experiences inflation differently depending on their income. Lower- and moderate-income households’ basket of goods may look different from the average, along with the proportion of their income they need to spend on necessities.

This is where inflation could be hard-hitting. Many welcome the downward trajectory of inflation, yet those in the lower-income cohort may not feel the difference. That’s because lower-income households spend 77% of their income on necessities – that’s more than double the 31% of income spend by higher-income households, according to the Federal Reserve. Among necessities, lower-income households spend 45% of their income on housing compared to 18% for high-income Americans.

Given that the consumer price indexes may fall short in representing lower-income households because of the way they measure consumer spending, is there a way to get a more accurate assessment on the health of the American consumer?

Inflation data underrepresents lower-income households

Every month the Consumer Price Index (CPI) and Personal Consumption Expenditures Index (PCE) gauge how the price of a basket of goods and consumer spending move inflation. Yet because these measures weight every dollar of expenditure equally, the indexes implicitly weight each household’s cost of living proportionally to their total expenditure.

Since lower-income households represent a relatively smaller share of overall expenditure, the inflation associated with their consumption baskets is underrepresented in the official consumer price indexes, as noted by White House National Economic Advisor Lael Brainard, who was the former vice chair of the Fed.

In view of this, Goldman Sachs Research analysts track activities across macro, industry, and higher frequency sources (such as app downloads, web and in-store traffic) to better evaluate the health of lower-income consumers.

They found monthly trends to be mixed recently, noting lower gasoline prices and improved mobility are positives for the consumer, but weaker credit metrics and slowing consumer confidence means consumers are still concerned about inflation and their income for the near future.

This leads to this consumer cohort being more selective in their spending on discretionary goods and on retailers.

Lower-income consumers on food choices

Food inflation was unchanged at 2.2% in March on the year. Within the category, food at home (grocery or supermarket purchases) CPI came in at 1.2% year over year while the food away from home (restaurant purchases) index came in at 4.2%. Goldman Sachs Research analysts expect food at home to moderate further throughout the year.

The Goldman Sachs Food Cost of Goods Sold (COGS) Index suggests Food at Home (FAH) inflation should moderate further

Source: Bloomberg, Haver Analytics, BLS, Company data, Goldman Sachs Global Investment Research

Within the restaurant purchases, limited service meal costs (takeout) rose 5% over the last year, while full-service (sit-down restaurant) meals also rose 3.2%.

Fast food giants are feeling the impact of elevated food away from home (restaurant purchases) inflation. One company noted in their fourth quarter call in February that grocery inflation has slowed at a faster pace than dining out, which is shifting lower-income consumers away from dining at their restaurants.

Goldman Sachs Research analysts noted over the last two grocery price deflationary periods in 2009 and 2016, eating out remained inflationary, likely due to labor costs.

The companies’ commentary suggests that price points are likely more important than value for both groceries and restaurants in 2024, as consumers are highly price sensitive.

Wage growth expected to support lower-income households

Despite the surprise inflation data and delayed Fed rate cut expectations, Goldman Sachs Research analysts maintain job gains and real wage growth to be strong in 2024. This in turn should support income growth, particularly for lower-income households.

Tax refunds have been $154 higher on average than that of the comparable 2023 period, which would be a relief for this consumer cohort.

Still, Goldman Sachs Research analysts remain skeptical that lower-income consumers would still have a significant financial cushion to support spending growth. Recent evidence shows median cash balances for households with income under $33,000 falling back to below 115% of their pre-pandemic levels – down from a peak of over 190% in 2021.

As the year progresses with mixed economic news, it's important to continue to monitor the potential financial impact on different households, which can help provide a more accurate picture of overall consumer health.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this website were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions.