According to a recent study by the Bank of America Institute, the share of households living paycheck to paycheck has jumped, with lower-income families particularly feeling the squeeze. This phenomenon is not only a personal financial crisis for millions but also raises broader questions about the stability of the economy moving forward.
Inflation and Wage Stagnation: The Core Drivers of Financial Distress
The combination of rising living costs and stagnating wages is a key driver behind the growing number of Americans who are struggling to make ends meet. In 2025, the inflation rate is estimated at around 3%, up from 2.3% earlier in the year, and it’s putting renewed pressure on already tight household budgets. The cost of essential items such as groceries, gas, and utilities continues to climb, making it harder for workers, particularly those in lower-income brackets, to keep pace.
Joe Wadford, an economist at the Bank of America Institute, pointed out that wages for lower-income households have been growing at a much slower pace than inflation, with wage growth stagnating at just 1% in the past year. “The gap between their wages and expenses has just continued to widen,” Wadford told CBS News, noting that this disparity is particularly painful for households that spend most, if not all, of their income on necessities.
This wage stagnation, coupled with higher living costs, is a major factor driving the increase in the number of Americans living paycheck to paycheck. Many workers, especially in the lower-income brackets, are finding that their wages simply don’t stretch far enough to cover their basic needs. While wealthier Americans have seen more significant wage gains in recent years, lower-income groups continue to struggle under the weight of rising inflation.
The Impact on Consumer Behavior and Economic Stability
The financial distress felt by millions of Americans has profound implications for consumer behavior, which is a crucial driver of the U.S. economy. As more households are forced to allocate a larger share of their income to cover necessities, discretionary spending has begun to slow. This could spell trouble for retailers, particularly in the run-up to the holiday season, a time when consumer spending typically spikes.
Melissa Bridgeford, a consumer behavior expert, emphasized that low-income Americans are heading into the holiday season under significant financial strain. “Inflation has continued to hit everyday essentials, and even toy prices are up,” she told Newsweek. This increasing financial burden could result in more cost-conscious shoppers, with families curtailing holiday spending, especially on non-essential items.
However, it’s not all bad news for retailers. According to Bridgeford, higher-income consumers are expected to continue spending through the holiday season, propping up the market. This group, which makes up the top 10% of earners, is responsible for a significant portion of U.S. consumer spending and is likely to remain resilient in the face of rising prices.
Yet, this dichotomy between the financial struggles of lower-income households and the continued affluence of wealthier Americans highlights what economists are now calling a “K-shaped” economy. This term refers to the diverging financial experiences of different income groups, with wealthier individuals benefiting from asset appreciation and stock market growth, while lower-income families continue to fall further behind.
