Yves here. The highly kinetic conduct of the Trump Administration, despite dominating news coverage, is unlikely to divert the attention of most Americans to day to day household budget realities. Inflation has still not been tamed. Consumers face the visible sign of ever-levitating egg prices along with pressure in many other expenditure categories, even with energy prices not presently being a big contributor. Tariffs are set to make matters worse. On top of that, we have Musk Federal employment and program whackage directly damaging many, plus creating broader anxieties.
Below, Tom Ferguson and Sevaas Storm describe a big and not sufficiently acknowledged driver: strong spending at the very top of the income distribution. The well off party on as most of the rest feel the wallet squeeze.
By Thomas Ferguson, Research Director, Professor Emeritus, University of Massachusetts, Boston, and Servaas StormSenior Lecturer of Economics, Delft University of Technology. Originally published at the Institute for New Economic Thinking website
Here we are again.
First the IMF, then the Fed belatedly tiptoed to the conclusion that we reached almost two years ago: that the bubbling consumer demand that has sustained US inflation in the face of Fed interest rate hikes is driven principally by the spending of affluent Americans whose wealth has soared thanks to the Fed’s doubling down on quantitative easing during the pandemic. Due to surging house prices and stock market prices, the net worth of the wealthiest 10% of US households has increased by more than 50% in nominal terms, or $36.3 trillion, during the first quarter of 2020 and the third quarter of 2024. This, in turn, has unleashed a powerful wealth effect on consumer spending, as we have repeatedly pointed out (Ferguson and Storm 2023; Ferguson and Storm 2024a; Ferguson and Storm 2024b).
Now comes Moody’s Analytics with more of the same. A Wall Street Journal article interviews that institution’s chief economist, Mark Zandi, and cites data and charts from the institution in support of the claim that “Many Americans are pinching pennies, exhausted by high prices and stubborn inflation.”
This is underscored by Figure 1, which plots the monthly change in real hourly earnings of American production and non-supervisory employees during January 2021 to January 2025. Higher prices did eat up almost all of the nominal pay raises of American workers, whose real hourly earnings rose by a pitiful 22 dollar-cents during these four years. Similarly, real median weekly earnings of American workers hardly increased during 2021Q4-2024Q4 (see Figure 2), even as prominent economic commentators trumpeted claims that the US labor market was extremely tight. The clamor about the looming threat of an imaginary wage-price spiral (Ferguson and Storm 2024a) diverted attention from the real action: astonishing increases in home values, the stock market, and the net wealth of the top 10%. Between January 2021 and December 2024, the S&P CoreLogic Case-Shiller U.S. National Home Price Index rose by almost 17% (in real terms), while the S&P Stock Market Index increased by a whopping 31% (also adjusted for inflation). In contrast, real weekly earnings of American workers grew by a grand total of just 0.4% during this period.
In America’s ever deepening dual economy, most citizens struggle to afford more than the basics and feel exhausted by the persisting financial stress. But, as the WSJ writes, “the well-off are spending with abandon. The top 10% of earners—households making about $250,000 a year or more—are splurging on everything from vacations to designer handbags, buoyed by big gains in stocks, real estate, and other assets. Those consumers now account for 49.7% of all spending, a record in data going back to 1989, according to an analysis by Moody’s Analytics. Three decades ago, they accounted for about 36%.”
A separate Moody’s Analytics report that Zandi himself issued at virtually the same moment echoes the importance of the wealth effect in explaining the strength of consumer demand and economic growth but cites statistics on spending by the top 20% of the income quintile instead. We have minor reservations about details of both sets of estimates. But none of our reservations add up to anything material. The latest data in the longer Moody’s piece extend to the same period as our last investigation. While neither Moody’s nor the Wall Street Journal ever directly make the crucial final conclusion, the linkage is clear: Yes, consumer demand by America’s most affluent citizens is indeed driving consumer spending, and consumer spending, in turn, is the main force keeping inflation so high.
The CPI inflation jumped in January 2025 — rising by 3% during the 12 months that ended in January and drifting away from the Federal Reserve’s inflation target of 2%. The Fed finds itself in a fix. On the one hand, it cannot lower the interest rate (as President Trump would like it to do), because the wealth bonanza enjoyed by the richest 10% is still fueling spending and inflation, while the majority of Americans have a hard time scraping by. It is perhaps oddly appropriate that a regime so intertwined with unelected billionaires is kept afloat by the spending of the super-affluent.
On the other hand, monetary tightening or any other shock that leads to a stock market selloff or decline in home values would rattle the confidence of the top 10%, cause them to cut back spending and hurt the economy. This may bring down inflation, but the collateral damage would be substantial.
The implication is that the Trump administration has a tiger by the tail. Waiving some qualifications, since after all, unilateral tariffs by the US would be one offs, unless they lead to escalating tariff wars, it is easy to understand why fears of still higher inflation are so pervasive. The Moody’s data provide further confirmation that wealth-price inflation, not any phantom wage-price spiral, is a powerful force running in the background as the administration sorts out its policies on tariffs and other issues.
‘the well-off are spending with abandon. The top 10% of earners—households making about $250,000 a year or more—are splurging on everything from vacations to designer handbags, buoyed by big gains in stocks, real estate, and other assets. Those consumers now account for 49.7% of all spending’
And this is exactly why Biden and the Democrats never saw the red wave coming to hit them – everybody they knew, including their consultants, said the economy was going great which is why Biden said in public the economy is going great. Of course the argument may have been made in private behind closed doors that it was not possible to hit the 10% with extra taxes instead of the bottom 90% to re-balance the economy. If they did, the economy would suffer too much as those rich people would stop spending!
Yah, I’m not sure things were rosy even at the top 10 percent before January 20th. The tech job market has really cooled down and people are coming down from the post-COVID YOLO travel and purchases. Maybe my friends and family in this tier were still spending but they’re not exuberant about it. I did see quite a few people finally break down and buy a house in the last 5 years, after decades of renting. I wonder if that kicked a lot of consumer spending up as they’re buying furnishings and appliances and getting trades people in to help them fix up the house.
Now DOGE is taking aim at a lot of gold plated rice bowls at government contracting and perhaps the finance sector (DOGE taking heavy early strikes at the various financial regulators, who have typically worked hand in glove with large financial institutions, is interesting), is going to be far more economically impactful than the firing of 75 percent of federal workers threatened by Project 2025.
The biggest shocker so far is that DOGE forced the Veterans Administration to cancel a huge number of contracts because they were described as consultant contracts, keeping in mind that basically anytime the US government procures services from the private sector, the word “consultant” gets thrown around to get around the ” inherently governmental function” concern about hiring non-feds to fill in work that federal workers are not staffed to do. Apparently this was done without any prior notice to the contracting officers or government program managers. Norms and decades of carefully crafted regulations and procedures completely out the window.
Ditto forcing the General Services Administration (the federal government body responsible for managing government building leases, a lot of routine building maintenance work, government credit cards, and a lot of routine “commercial” goods and services like monitors and software licenses) to cancel leases on government buildings and selling government owned buildings, again without prior notice to the program managers and contracting officers responsible for the leases – who may sin be unemployed as DOGE asked for a 50 percent cut in head count at GSA). This stuff is pretty much impossible to reverse at a large scale. This is at least one previously very cozy corner of the world where decades are happening every week.
Also apparently most government credit cards used by federal employees to travel and pay for small dollar purchases has been reset to a limit of $1.
Anti-DEI means the deference that American government contracting has given to “small” businesses for almost a century, is getting smashed to bits and preparing the ground for those with deeper pockets to come in. A lot of the dwellers of very nice houses in DMV (DC/Maryland/Virginia) suburbs must be laying awake at night wondering when their number is going to be up.
It’s going to be an interesting couple years, possibly decades, possibly forever, for some people who were at the top of the current American economic pyramid.
Luxury spending slowed in 2024:
https://www.fashiondive.com/news/bain-luxury-spending-flat-worst-2024/733451/
https://www.mckinsey.com/industries/retail/our-insights/state-of-luxury
https://institute.bankofamerica.com/economic-insights/luxury-spending.html
If consumers are feeling the squeeze, then where is the crisis?
https://wolfstreet.com/2025/02/19/our-drunken-sailors-and-their-credit-cards-delinquencies-balances-burden-and-available-credit-in-q4-2024/
https://wolfstreet.com/2025/02/18/auto-debts-auto-loan-to-income-ratio-serious-delinquencies-for-prime-subprime-our-drunken-sailors-and-their-auto-loans-leases/
Muppets only have themselves to blame. As has been well documented by Wolf Street, incomes are outpacing inflation and muppets have been spending like drunken sailors.
https://www.spglobal.com/spdji/en/indices/equity/sp-global-luxury-index/#overview
Luxury stock index has gone nowhere the past year, so no, the rich have not been splurging on luxury handbags.
Thanks for this. Though honestly better than I thought.
I bought a lot of my protein from D’Artagnan (high end online meat seller that sell a lot to mid to upper end of American restaurants but also direct to consumer) and their prices haven’t gone up much after an initial COVID spike. Ditto Costco where a lot of prices actually are going down because of dollar strength.
I definitely haven’t seen it in my upper middle class circles. They’re still spending but it’s on things they perceive as necessities (insanely expensive child care and child enrichment activities, “sanity” vacations, smaller home updates but reluctance for taking on bigger projects). I imagine that Gaza, Ukraine, and saber rattling against China aren’t opening a lot of Muslim, Chinese, or Russian pocketbooks either.
>Eggs & You
It’s the name of a restaurant in Ft Lauderdale on the south bound corner of Federal and 26th. I drove by it last week and thought to myself that I haven’t had an egg in a long time. So back in Central rural PA this week and I decided to buy some eggs, they were $7.95. The shelf was only 40% filled and I wondered if it was the price or availability. It started me wondering about maybe getting a chicken coup, but I realized it wouldn’t work until I retire in a couple of years.
I don’t think the politicians really care or not on what my thoughts are on the price of eggs at the grocery store, they are too busy lining their pockets, most of them, with exceptions I surmise. Will Trump feel the heat? I hope so, it will mark how he will act viz the Fed and what influence he can exert on monetary policy. Maybe the market will self-correct, I’m not buying eggs at this price, I’ll skip breakfast altogether and have a bigger lunch. I need to lose 10 pounds anyway.