Understanding the Impact of Inflation on Consumer Spending
Consumers, overall, are struggling to keep up with the increased cost of living. The consumer price index rose 2.7% in November on an annual basis, according to a delayed report from the Bureau of Labor Statistics released Thursday. That’s less than expected, but still above the Federal Reserve’s target.
However, the pain of persistent inflation is not shared equally. “Inflation is a point of stress for everyone, but recent price increases are hitting lower-income households the hardest,” said Taylor Bowley, an economist with Bank of America Institute.
In August, lower-income households’ year-over-year inflation rate was roughly 3%, compared with 2.9% for middle and higher-income households who spend a smaller share of their income on food, energy and shelter, according to a Dec. 11 Bank of America Institute analysis of data from the Federal Reserve Bank of New York.
Personal inflation rates can vary based on the basket of goods specific to your household and other factors, including income or geography. Different income brackets may also have distinct inflation rates based on how much of their spending falls into certain categories, such as food, housing or entertainment.
Low-Income Families and the Struggle with Inflation
“Lower-income groups are in many ways affected most by increasing prices,” said Francesco D’Acunto, a professor of finance at Georgetown McDonough’s Psaros Center for Financial Markets and Policy. “The data is very clear about that.”
Largely because lower-income households spend more of their money on necessities such as food, rent and transportation costs, “they are hit more, relative to higher-income groups who spend more on services,” D’Acunto said.
Shelter costs, specifically, have also experienced higher-than-average inflation spikes, according to the Bank of America Institute report. “Rent has been really sticky,” said Bowley, a contributor to the report.
Credit Card Debt and the Widening Gap
A family shops in a Walmart Supercenter on May 15, 2025 in Austin, Texas.
How inflation is absorbed further widens the divide, according to D’Acunto. When it comes to covering expenses, “higher-income groups get advantages from using credit cards,” he said, such as cashback and reward points — “whereas lower-income groups tend to have more rollover debt.”
Roughly 175 million consumers have credit cards, according to TransUnion. While some pay off the balance each month, about 60% of credit card users have revolving debt, according to the New York Fed.
Consumer Spending Despite Inflationary Fears
At the same time, nearly all households have been slow to adjust their spending habits even as prices rise. While consumer sentiment nears an all-time low, shoppers continue to spend, especially now during the peak holiday season, other reports show, often relying on credit cards to bridge the gap.
However, that could come at a price in the new year, the experts said. Roughly one-third, or 32%, of Americans feel their personal finances will get worse in 2026, according to a recent Bankrate survey, notching the highest level of pessimism since 2018.
Financial Vulnerability and the Risk of Economic Shocks
Those fears may be justified, according to D’Acunto. The risk of continued inflation and growing debt burdens could leave many Americans financially vulnerable in the event of a downturn, he said.
“People are already struggling so much, especially at the lower end of the income distribution,” D’Acunto said. “If an unexpected economic shock hits in 2026, it would be very, very hard.”
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Smart Tip for Readers
To better manage your personal finances amidst inflation, consider tracking your expenses to understand where your money is going and identify areas where you can cut back on non-essential spending, which can help you build a more resilient financial foundation.
