The U.S. economy continues to show signs of a “K-shaped” recovery. In this pattern, higher-income households experience stronger growth in spending, while lower-income households lag behind. A new analysis from the Federal Reserve Bank of New York’s Economic Heterogeneity Indicators (EHIs) reveals that high-income consumers have been the main force behind recent retail spending growth. This post explores why this divide exists by looking at what people are buying and what economic factors—wages, inflation, and wealth—are shaping the differences.
Who Is Buying What?
Researchers examined real spending growth (adjusted for inflation) since January 2023 for different types of goods. They divided purchases into two main categories: necessities (such as food and gas) and luxuries (retail spending excluding autos, food, and gas).
The results show a clear pattern. Spending on luxuries has risen for all income groups since 2023, while spending on necessities has generally declined or grown more slowly. Importantly, the overall increase in retail spending has been powered mainly by luxury purchases.
Both necessity and luxury spending follow the same K-shaped trend: high-income households increased their spending the most, while lower-income groups showed weaker growth or declines. This divide appears across income levels, confirming that the K-shaped pattern is widespread in consumer behavior.
What’s Driving the Divergence?
To understand why spending patterns differ so sharply, the researchers looked at three key factors: wages, inflation, and wealth.
Wages: Data from the Federal Reserve Bank of Atlanta’s Wage Growth Tracker shows mixed results. While the lowest-wage workers have seen the slowest wage growth in the past year, this has not always been true. In some periods during 2023 and 2024, low-wage workers actually had the fastest growth. Because wage trends do not fully line up with the timing of the K-shaped spending split (which became clear in late 2023), wages alone cannot explain the divide.
Inflation: Inflation has hit lower-income households harder. Starting in late 2022, the bottom 40 percent of income earners faced higher-than-average inflation, while middle- and high-income groups experienced inflation at or below the national average. Higher inflation effectively reduces purchasing power, making it more difficult for low-income households to increase their spending.
Wealth: Wealth differences provide the strongest explanation. Using data from the Federal Reserve’s Distributional Financial Accounts, researchers found a pronounced K-shaped pattern in household net worth (assets minus liabilities) since early 2023. Higher-income groups, especially the top 20 percent and top 1 percent, saw much stronger growth in real wealth. The top percentile’s real net worth grew more than 25 percent, compared to less than 10 percent for the middle 40 percent.
This wealth growth was driven largely by increases in financial assets, such as stocks and other investments, which are more commonly held by higher-income households. These gains appear to have given wealthier consumers the confidence and means to spend more freely on retail goods.
Looking Ahead
The K-shaped economy in retail spending reflects broader differences in how households have experienced the post-pandemic period. While earnings show some variation, differences in inflation and especially wealth accumulation—particularly financial assets—have played major roles in widening the gap.
This reliance on wealth raises important questions. If financial markets face a correction, could high-income spending slow down sharply? Economists will continue tracking these demographic differences through future updates to the Economic Heterogeneity Indicators to better understand the health of consumer spending across all income groups.
