'Squeezing more life out of every dollar': How inflation is forcing a new reality on American families and amplifying the economy's 'K shape'

By Greg Robb

Higher prices are crimping spending among lower- and middle-income consumers, Fed's beige book reports

Higher energy costs are pushing up grocery-store prices.

Inflation surged throughout the U.S. economy in late April and May, forcing Americans to try to quickly adjust to a new phase of reduced spending power, according to the Federal Reserve's latest report on economic conditions around the country, known as the "beige book."

Affordability pressures due to higher energy prices from the war with Iran led to a widening gap between spending across income groups, the Fed said.

Low-income consumers showed the most financial strain.

In the Kansas City region, middle-income households were described as "squeezing more life out of every dollar before deciding to spend it."

Only higher-income households, less sensitive to price increases, remained resilient.

The K-shaped-economy phenomenon was in evidence at one large shopping mall in New York state. The mall reported that higher-end tenants were seeing particularly strong demand for luxury goods, with affluent buyers focused on accessories, especially wristwatches. At the same time, midtier and lower-end retail tenants saw more subdued sales.

In Atlanta, a business contact said that higher-end consumers were focused on "unapologetic luxury."

To adjust, most Americans turned to credit cards, fewer retail visits and a focus on necessities.

Overall, the subdued spending led to a slight to moderate growth pace across the country, the Fed survey found.

The outlook over the next six months was also subdued, with businesses expecting little change in growth, with "elevated uncertainty" weighing on sentiment.

And inflation wasn't confined to gasoline prices. Higher energy prices spilled over to shipping, packaging, groceries and fertilizer.

There were also reports of higher prices for many items outside of energy, including car repairs and electronics.

The survey showed that businesses worried about their profit margins and debated whether to pass along their higher costs to consumers.

Several Fed districts highlighted the inflation-mitigation strategies of businesses, including supply-chain adjustments, reduced offerings and absorbing higher costs to preserve customer demand.

In the Northeast, according to the Fed report, "most contacts did not plan to raise their output prices in the near term, even though many were concerned that cost pressures linked to the Middle East conflict could persist for a while."

In Philadelphia, "consumer-facing" businesses held their prices steady, but manufacturers adjusted their prices upward by a 21/2-year high of over 4%.

Wage growth stayed modest to moderate, but Fed districts reported "more frequent wage adjustments and cost-of-living increases to manage increasing fuel and other household cost pressures," the Fed said.

Sal Guatieri, senior economist at BMO Capital Markets, said that these wage increases could turn the oil-price shock "into a persistent general rise in inflation."

The beige book is "the latest warning sign that inflation is quickly turning into a sticky problem," said Heather Long, chief economist at Navy Federal Credit Union. "It's a tricky environment for the Fed, but for now the economy has an inflation problem."

The new Fed chair, Kevin Warsh, and his colleagues will meet June 16-17 to discuss interest-rate policy.

"Warsh has to assure the world - especially bond investors - that he will do whatever it takes to ensure inflation comes back down to normal," Long said.

-Greg Robb

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06-03-26 1703ET