About half of the adult population of the United States has never been here before. Most consumers are too young to remember the last time inflation reached its current levels, where prices are rising more than 8% per year.
“What we’ve been predicting for months is what’s happening now,” Nayar said. “Inflation affects everyone’s wallet, regardless of whether you are at the upper or lower end of the income spectrum.
“There will be tight belts, and there’s no better time than the present to step back and take stock. That means focusing on where to cut spending, while building the cash cushions needed to navigate the paycheck-to-paycheck economy.
It is a financial education that will be played in real time.
“There will be a learning curve,” he said. “Consumers need to take a step back and take stock of their finances, separating the most imperative and unchangeable spending from discretionary and postponeable purchases.”
All consumers, regardless of income level, will need a cushion to save and ensure they can make choices that will have positive ripple effects – and that they won’t get stuck between the proverbial rock and the anvil. This includes the highest earners among us.
“Inflation may have peaked – or it may not, but it’s going to last for a while,” Nayar said.
Top earners, at $100,000 and above, have some flexibility to make a wider range of choices about what they spend and what’s essential, he said.
“There’s a bit of choice at work here,” Nayar said, “because with more income…you also tend to end up with more bills.”
Housing costs take their toll
However, the $100,000+ club has its own constraints, partly related to the fixed costs of maintaining a roof over its head.
Digging a little deeper, the hotspots become a little clearer. Data shows consumers in urban areas are more likely to live paycheck to paycheck – and they’re also more likely to earn more than $100,000 a year. The demographics are also younger, and without the experience of having lived through inflation before, these consumers may struggle mightily.
A lot comes down to housing, Nayar said, which is taking more and more purchasing power from our paychecks as inflation rises. It is often one of the biggest monthly expenses and the cost of living tends to be higher in urban areas.
He gave the example of living in San Francisco, where he said, “If you are a family of four with a household income of less than $120,000, you are considered low income.
Recent Bay Area housing market statistics, he continued, show that the minimum amount a family must earn to buy a home is about $235,000.
Read more: Urban or rural, the paycheck-to-paycheck pinch puts equal pressure on the consumer
Eighty-eight percent of high-income people living paycheck to paycheck may not have trouble paying bills (leaving 12% who actually have trouble), this which means they’re fine, but not better than that – just OK.
This time will be different
Just being OK can be a tenuous state of existence. If there’s a recession going on, as the Federal Reserve raises rates, it’s going to be nothing like the recession two years ago, Nayar said.
Think back to the times of COVID. The pandemic hit hard and economic growth sank like a stone. Interest rates were low and some consumers had plenty of funds, which meant strong purchasing power at their fingertips once we all stopped sheltering in place.
People didn’t spend because they couldn’t, but they wanted to. There was a huge backlash, Nayar said, as pent-up demand was unleashed.
But now we are seeing a change, he said. Purchasing power is eroding. People have to make choices about what to buy and when, because the costs of basic necessities, like gas and groceries, are all rising.
“You have to make choices about what you’re going to do,” he told PYMNTS. “Does rising costs mean you’ll delay buying your next car or pushing back your next vacation? These choices will have repercussions on the economy in the months and years to come.