Recent data shows lower-income Americans are increasing spending at a pace nearly matching higher earners, even as overall consumer spending growth slows and inflation pressures persist
For much of the past year, U.S. economic data has highlighted a widening gap between the spending power of the nation's highest earners and everyone else. With stock indexes reaching record highs earlier this month, affluent households-who own the bulk of equities-have continued to spend freely, while many lower-income Americans have struggled to keep up with rising grocery and energy costs.
This divergence has been described as a K-shaped economy, where the financial fortunes of the top and bottom segments move in opposite directions. But recent analysis from Bank of America suggests that this gap is narrowing, as consumer spending growth slowed to 5% year over year in July, down from 6.3% in June. The moderation is attributed to several factors, including the end of temporary boosts like World Cup-related spending and the shifting timing of major online sales events.
Spending Patterns Shift
Earlier in the year, tax refunds helped lower-income households increase their spending. As those funds have been spent and gas prices remain elevated due to ongoing geopolitical tensions, these households are now allocating more of their paychecks to fuel, leaving less for other purchases. According to Bank of America, credit and debit card spending per household rose 5% year over year in July-a strong reading compared to recent years-but when gasoline is excluded, total spending increased just 4.3%, down from 5.6% in June.
Analysts note that the slowdown in July was expected, given that June's figures were inflated by one-off events. Online promotions occurred earlier this year, pulling some spending forward, and World Cup-related activity peaked in June. Fluctuations in global oil prices also played a role, with gasoline spending easing somewhat in July. Despite these shifts, Bank of America's data shows that U.S. consumers have maintained relatively steady spending growth through the summer months.
The Great Convergence
Bank of America has tracked the K-shaped economy for over a year, documenting the growing divide in spending and wage growth between higher- and lower-income households. Since May, however, the gap has narrowed significantly. By July, spending and wage growth rates for lower- and middle-income Americans had largely converged-a trend the bank calls "The Great Convergence."
In July, lower-income households increased spending by 5.4% year over year, while middle-income households saw a 4.9% rise. Discretionary spending showed a similar pattern. The bank attributes this narrowing to stronger after-tax wage growth: 5.2% for lower-income and 4.2% for middle-income households. As a result, the difference between spending and wage growth has nearly disappeared for lower-income groups. Still, the top 5% of earners remain outliers, with both their wages and spending continuing to outpace the rest of the population.
Affluent Households and the Wealth Effect
While the middle and lower segments are converging, the highest earners continue to benefit from robust equity markets. Bank of America analysts suggest that the recent slowdown in after-tax wage growth among the top 5% is likely due to the fading impact of earlier bonus payments. Yet, their card spending remains strong, likely fueled by the wealth effect from rising stock prices. The S&P 500, for example, was up nearly 20% year over year in July, disproportionately benefiting those with significant equity holdings.
Bank of America's internal 401(k) data also shows that average retirement account balances were much higher in the second quarter of 2026 compared to previous years. However, the immediate impact on spending is more pronounced for those with liquid investments, such as directly held stocks, than for those with gains locked in retirement accounts.
Spending patterns among affluent households are concentrated in general merchandise, lodging, and durable goods (excluding electronics). The largest differences in spending between income groups are seen in categories like airlines and clothing. Interestingly, lower-income Americans are increasing their restaurant spending at a faster rate than their wealthier counterparts.
As consumer spending patterns evolve, the interplay between wage growth, inflation, and asset prices continues to shape the broader economy. For readers interested in how inflation data is influencing Federal Reserve policy and the debate over interest rate cuts, see this analysis on how Goldman Sachs is shifting its focus to inflation trends.
Key Figures and Market Context
According to the Bureau of Economic Analysis, U.S. personal consumption expenditures rose 5.8% year over year in June 2026, with core inflation (excluding food and energy) running at 3.2% annually. The national average price for regular gasoline hovered around $4.10 per gallon in July, according to the U.S. Energy Information Administration. Meanwhile, the S&P 500's nearly 20% year-over-year gain in July underscores the continued strength of equity markets, which has a disproportionate impact on the spending power of higher-income households.
Understanding the dynamics of consumer spending is crucial for interpreting broader economic trends. While overall spending growth remains positive, the narrowing gap between income groups suggests that wage gains are finally reaching more Americans. Yet, the persistent advantage for the wealthiest households-driven by asset appreciation and higher discretionary spending-means that the K-shaped recovery is far from resolved. For households across the income spectrum, the balance between rising wages, inflation pressures, and asset values will continue to influence financial decisions in the months ahead.
