According to economists, it could take years before low- and middle-income Americans can add “fun” back into their budgets, as most of their earnings barely meet the rising costs of essential goods.

Though annual inflation has recently decreased to its lowest figure since February 2021 and wage growth outpaces inflation, economists argue that low- and middle-income households are still struggling to afford basic needs like food, housing, utilities, and fuel.

It’s important to note that a slowdown in inflation only indicates a reduction in the speed of price increases, not a decrease in prices themselves. As a result, families continue to pay more for everyday necessities.

Low- and middle-income families bear a heavier burden compared to wealthier households because essentials make up a larger portion of their budgets. Their spending on non-essential items, such as dining out and entertainment, has just started to recover, according to economists.

“A significant portion of Americans, particularly the bottom 60%, are spending more on essentials now than they did before the pandemic,” noted Michael Pearce, deputy chief U.S. economist at Oxford Economics. “The lowest income groups are facing the greatest hardship, but middle-income households are also affected. It may take years for spending habits among low-income Americans to bounce back.”

‘No Financial Improvement’

According to the monthly Primerica Household Budget Index (HBI), middle-income Americans’ buying power, which suffered a significant decline during the inflation spike of 2021-2022, has only just climbed above pre-pandemic levels. The HBI measures whether families can make financial gains or risk falling behind based on the cost of daily necessities and changes in their earnings.

In August, the HBI reached 102.2%, a recovery from the low of 86.7% recorded in June 2022 when inflation peaked at a 40-year high of 9.1%. This level is the highest since February 2021. Currently, households are neither in a better nor worse position compared to January 2019 when the HBI was at 100%, indicating that middle-income Americans are slightly better off than in 2019 but still recovering from the challenges faced in 2022.

“Had we not experienced this wave of inflation, the HBI would be around 112.5%,” commented Amy Crews Cutts, an economic consultant with Primerica. “This discrepancy helps explain the prevalent consumer sentiment indicating that even though conditions have improved, households have seen almost no financial progress over the past five and a half years.”

A Gallup survey conducted this month revealed that 52% of Americans believe they and their families are in a worse economic situation today than four years ago. “Inflation is likely the reason many Americans perceive the economy as struggling, despite low unemployment rates, steady economic growth, and rising stock and housing values,” the survey noted.

How Long Until Normalcy Returns?

The timeline for returning to normalcy is uncertain and depends on wage increases and whether costs for essentials like gas or rent decrease, according to Pearce.

During the Global Financial Crisis of 2007-2008, low-income Americans faced similar declines in discretionary spending, which took five to ten years to recover. Pearce explained that this recovery happened mainly because gas prices fell significantly.

“It’s difficult to predict any comparable significant cost reductions in the near future,” he added.

Making Sacrifices

Christa Engel, a 58-year-old Dunkin’ store manager from Chicago, continues to manage her finances carefully.

To adapt to the high prices, Engel mentioned that she and her husband have not only reduced their indulgences but also look for sales whenever possible.

“For me, given that we have two incomes, it isn’t too bad,” she explained. “I try to buy items on sale as much as I can, like crackers and frozen pizza. We’ve had to cut back on dining out and other non-essential treats.”

As expenses for essentials take priority, people are “eliminating fun rather than saving or spending their savings,” Cutts remarked. “Inflation has significantly disrupted their finances. It’s disheartening to see that, despite being in a booming economy where people have jobs and companies are thriving, many are still facing challenges. This underscores the lasting impact of inflation.”

Amy Aaroen, 63, from Beloit, Wisconsin, shared that she has cut back on many “luxuries” such as running the air conditioning, watering her garden more sparingly, and visiting family last summer.

“We avoided using central air this year as much as we can to keep bills down,” Aaroen said. “We also limited watering the garden to save on our water bill. Just traveling to see my family, who are only about 1.5 to three hours away, costs me about $50. The economy has forced us to travel and visit family less.”

Will holiday spending be influenced?

Analysts suggest that consumers in low to middle-income brackets are likely to continue seeking discounts this holiday season.

“We are witnessing the effects of inflation on the middle-class shopper,” noted Adam Davis, managing director at Wells Fargo Retail Finance. “Spending on high-ticket items is decreasing, hinting at tighter holiday budgets, with some consumers opting for cheaper alternatives as they search for deals.”

Aaroen mentions that despite needing to cut back throughout the year, “we’ve managed to maintain a budget that shouldn’t significantly impact our holiday spending. We have 11 grandchildren and typically spend around $25 to $30 on each of them. This year, we anticipate doing the same, although we may have to rely on our credit card.”

She added, “Yes, we will certainly spend time with family during the holidays. However, visits in between may be less frequent.”