How inflation's wrath, recession fears are heading into middle, upper, class America

Medora Lee
  • Lower-income groups were the first to get hit hard by surging inflation and recession fears.
  • Now, 40-year high inflation and rising recession odds are growing concerns for the middle class too.
  • Many of them are cutting back spending and trading down, even frequenting dollar stores.

When anesthesiologist June Lee’s friend asked whether she wanted to go to a baseball game this summer, she paused.

The seats were considered “cheap seats,” but they were still $100 per ticket (she needed four for her family), plus the cost of any food, beer and transportation. Weighed against the soaring prices of everything, a double-digit decline in her 401(K) balances and potential recession, she said thanks. But no thanks. 

“I am in full recession mode,” Lee said. “Normally, I wouldn’t give it so much thought. That’s the first time I’ve ever done that.” 

She’s not alone.  

As inflation continues to surge and linger above a 40-year high, middle-income Americans are now feeling the squeeze along with their lower-income counterparts, economists say. And that could spell deeper pain for the economy starting in the second half of this year. 

Inflation’s progression 

In March and April, adults earning less than $50,000 annually were unable to pay basic expenses each month and started to reallocate their money to essentials like food and gas from discretionary items like travel, said John Leer, chief economist at credit-decision intelligence company Morning Consult. 

In May, that problem started to move to middle-income groups that earn up to $100,000 annually, he said. By June, people weren’t just reallocating their money into different buckets, they were spending less, Leer said.

That bears out in recent data, too. Lower income consumers began to feel pressure in the first quarter from inflation, but that moved up the income spectrum with middle-income earners showing the most weakness in second quarter at Walmart and Target, JP Morgan analyst Christopher Horvers said in a research report.

Though high-income earners were most resilient, there were signs of slowing there too. "Across second quarter, the data shows an acceleration in Walmart’s sales from high-income customers, which is likely due to trade-down from more conventional grocers as consumers seek value," Horvers said.

High-income consumers, who generate a disproportionate share of spending, are also starting to feel gloomier, which can translate into spending cuts. In August, those consumers "registered large declines in both their current personal finances as well as buying conditions for durables," Joanne Hsu, University of Michigan Surveys of Consumers director, said.

Leer expects those earning more than $250,000 to start to feeling more of the pinch later this year.  

“The second half of the year will be challenging for travel and other discretionary spending,” Leer said.  

June Lee, anesthesiologist

Are there signs consumers are nearing a tipping point? 

Hints of distress are bubbling up everywhere.  

Wages aren’t keeping up with inflation, people have felt gloomier, and they’ve been forced to dip into savings and credit cards, economist said. Consumer confidence in the economy fell for the three consecutive months ending in July, according to the Conference Board, and the University of Michigan’s sentiment index hovers near record lows.

The personal-savings rate, which surged more than 33% during the height of the pandemic, dropped in June to 5.1%, the lowest since the Great Recession in 2008.  

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Meanwhile, total household debt rose $312 billion, or 2%, in the second quarter, to $16.15 trillion, the New York Federal Reserve said this week. Mortgage balances, the largest component of household debt, climbed $207 billion, to $11.39 trillion as of June 30, but credit-card balances also surged. Balances posted their largest year-over-year percentage increase in more than 20 years and aggregate limits on cards marked their largest increase in more than 10 years.   

“If you have a job, credit-card spending is OK, but you can’t repay it if you lose your job,” Leer said. “That’s the last shoe to drop here.”  

Will the jobs market collapse? 

For now, the job market still looks strong. There are still 1.8 job openings for each unemployed person, and the quit rate (a barometer of how confident people feel about quitting a job and finding a new one) is still high, latest government data show. 

The key monthly jobs report is due on Friday, and some economists still expect solid growth. Wells Fargo on Wednesday even raised its forecast for 240,000 nonfarm jobs added in July from 215,000. 

For Ryan Sweet, Moody’s Analytics economist, “the July employment report is a little backward looking, and therefore we’re paying close attention to initial claims for unemployment-insurance benefits.” 

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Weekly jobless claims have crept up to the highest levels since late 2021, but aren’t at alarming levels yet. Layoffs or hiring freezes, though, continue to be announced almost daily. So far, most of those have come from the tech sector or pandemic highfliers like Oracle, Peloton, Apple, or Robinhood, but some economists expect that to widen as the economy slows under the weight of higher interest rates. 

On Wednesday, Morning Consult released data from 20,000 surveys taken each week throughout July showing the share of U.S. adults reporting lost pay or income increased to 11.7% in July from 11.0% in June. Lost pay, it said, often moves in line with weekly claims, and this is an early warning sign for the labor market. 

How are people coping and what does this mean for retailers? 

Many consumers are delaying large purchases like homes (existing-home sales declined for the fifth straight month in June), and even more are trading down, or substituting name brand items with private labels. 

They’re also making more visits to discount stores, a boon to dollar stores. Dollar stores, which tend to see their highest traffic around the holidays as people search for value-priced holiday gifts and party supplies, saw 13.2% more visits last quarter compared with the first quarter, and 8% more year-over-year, data showed. Compared with the same period in 2019, foot traffic was up 20.5%.  

And many of those visits come from higher-than-typical income groups. For example, the average household income for Dollar General customers is $35,000 to $40,000, but the chain’s seen a surge in shoppers with income between $45,000 and $55,000, Matthew Boss, JPMorgan analyst said. 

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This may be why the three biggest dollar stores – Dollar General, Dollar Tree and Family Dollar – make up half of all store openings in the U.S. and offer more food and consumables items these days, said Renee Wege, a senior publications manager at research firm Datassential

Though most dollar-store locations are in areas where median incomes are between $35,000 and $44,000, there are more stores in the next bracket up ($45,000 to $49,000) than the one below ($30,000 to $34,000), Datassential data showed. 

"It's a crazy time," Lee said. "The Great Recession didn't hurt as much because there was no inflation. But this economy is so different from 2008."

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.