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Amid recession fears, government shutdowns and price uncertainties, consumers are increasingly diverging in their spending.
The richest Americans are leveraging their purchasing power, while the lowest-income Americans are starting to pull back – what is commonly described as a “K-shaped” economy. Friday’s Consumer Price Index report highlighted the pressures facing large parts of the country.
The CPI report, which measures price changes for a range of goods and services, was delayed due to the government shutdown, originally scheduled to be released nine days ago. The report was colder than expected, showing an increase of 0.3% for the month. That brings the annual inflation rate to 3% and signals a likely rate cut by the Federal Reserve next week.
A subset of the CPI report also helps determine the Social Security Administration’s cost-of-living adjustment, which the agency estimates will be 2.8% in 2026.
Low- and middle-income consumers have been hit hardest by rising costs of basic necessities like groceries and gasoline. Meanwhile, wealthier investors have benefited from rallying stock markets and rising home values. Recent data from from JPMorgan The cost of living survey found that income bracket was a significant factor in Americans’ differing opinions on the current state of the economy.
Here’s where the bifurcation begins to set in:
Food and drinks
Coca-Cola, often considered an indicator of the financial health of consumers, has noticed discrepancies within its activities.
More expensive products with greater exposure to higher-income consumers, such as Topo Chico sparkling water and Fairlife protein drinks, are fueling the company’s sales growth, CEO James Quincey said Tuesday on CNBC’s “Squawk on the Street.”
At the same time, Coke is seeing higher demand at both dollar stores that cater to lower-income consumers looking for deals and at upscale outlets aimed at wealthier consumers, like fast-casual restaurants and amusement parks.
McDonald’s CEO Chris Kempczinski told CNBC’s “Squawk Box” in early September that the burger chain’s expansion of its value menu was a response to a divided consumer landscape, or what he called a “two-speed economy.”
While Kempczinski said the company was seeing high-income consumers perform well, its low- and middle-income customers were “a different story.”
“Low-income consumer traffic is down double digits, and that’s because people are choosing to either skip a meal…or just eat at home,” he said last month.
A similar dynamic plays out Chipotleaccording to CFO Adam Rymer.
“Certain cohorts of consumers, certainly on the lower income side, are feeling pressure right now. That’s something we’ll have to take into consideration when we look at prices going forward,” Rymer told Reuters in July.
On Friday, Procter & Gamble said the company was seeing K-shaped shopping behaviors among its consumers, with wealthier shoppers purchasing larger packages from club retailers and lower-income shoppers depleting their pantry stock before returning to stores.
“The consumer environment is not great, but stable,” Chief Financial Officer Andre Schulten said on a call with reporters.
Cars and plane tickets
Last month, the average price of a new vehicle exceeded $50,000 for the first time ever, according to Cox Automotive’s Kelley Blue Book.
This record price comes as defaults and repossessions on auto loans are on the rise, particularly for those with FICO scores below 620.
“Today’s auto market is driven by wealthier households who have access to capital, good borrowing rates and support the high end of the market,” Cox Automotive executive analyst Erin Keating said in a statement last week.
And although airlines have been testing premium offerings for years, more expensive tickets have gained momentum in recent months.
Delta Airlines said earlier this month that revenue from its premium offerings is expected to surpass coach cabin revenue next year, with CEO Ed Bastian saying he sees no signs of slowing down in the roomier, more expensive seats.
Hospitality
Yet while there are signs of a “K” shaped economy, some argue it is not here to stay.
Hilton CEO Christopher Nassetta told CNBC last month that he’s seeing a bifurcation, but he doesn’t expect that trend to last much longer, in part because he sees inflation and interest rates falling.
“My own belief is that as we look at the fourth quarter and particularly next year, we’re going to see a really big shift in that dynamic, which means I don’t think that this bifurcation is going to continue,” Nassetta said. “That’s not to say that I think the high end is going to get worse or worse, I just think the mid and low end are going to increase.”
On Wednesday, the hotel chain reported declining revenue from affordable brands like Hampton by Hilton and Homewood Suites by Hilton.
Meanwhile, Nassetta told investors during an earnings conference call that revenue from luxury offerings has performed extremely well and remains a priority for Hilton going forward.
— CNBC’s Amelia Lucas, Michael Wayland, Alex Harring, Luke Fountain and Leslie Josephs contributed to this report.