Middle-Class Life in America

How Inflation has Changed Perceptions

Key Takeaways:

• Many people have inaccurate beliefs about the current economic state.
• For the past 20+ years, the average annual inflation rate has been approximately 2.2%
• The economy is performing far better than many Americans perceive with real GDP expanding at a 2.9% annualized.
• Unemployment rates remain low, (at nearly a 50-year low), and many industries are experiencing strong job growth.
• Over the past 30 years, the average 30-year fixed mortgage rate in the U.S. has been approximately 6-7%.
• The current 30-year fixed mortgage rate is approximately 7%

Deeper Dive

Inflation is reshaping how Americans view middle-class life, leading to heightened financial anxiety and a reevaluation of what it means to achieve economic security. Rising costs and shifting perceptions of the economy are making traditional middle-class milestones feel increasingly out of reach for many. However, while some of the challenges are undeniable, a closer look reveals opportunities for resetting expectations, regaining confidence and navigating this evolving landscape with strategic planning and financial resilience.

Rising Financial Anxiety

The American middle class has traditionally been associated with financial stability, a hallmark of achieving the "American Dream." This stability manifests through home ownership, steady employment, access to healthcare, the ability to save for retirement, and the ability to afford higher education for children. However, the definition of financial stability has evolved, and achieving it has become much more challenging for many Americans due to economic and societal changes. Inflation has disrupted this narrative, with many middle-class households citing rising prices as a significant barrier to achieving their "American Dream."

According to recent surveys, financial anxiety among middle-class Americans is at record highs.

• The cost of essentials like food, gas, housing, and healthcare has surged, forcing households to cut back on discretionary spending.
• Many households are dipping into savings to make ends meet, leaving less room for future investments or emergencies.
• Uncertainty about the ability to retire comfortably is widespread, as households question whether their savings will be enough to sustain them through retirement.

A 2023 study revealed that over 60% of middle-class households report living paycheck to paycheck. Even those with stable incomes struggle to save for emergencies or long-term.

• Persistent inflation has eroded purchasing power, with families spending significantly more on essentials like food and utilities compared to previous years.
• Rising expenses for housing, groceries, childcare, and healthcare are outpacing income growth, leaving little room for discretionary spending.
• Surveys indicate that over 40% of middle-class households have delayed or avoided healthcare due to high medical cost concerns
• Education debt disproportionately affects the middle class. The resumption of federal student loan payments has amplified anxiety.
• Despite low unemployment rates, many feel that job security and benefits, once hallmarks of middle-class employment, have eroded. Studies show that 35% of middle-class workers worry their jobs may become obsolete within the next decade.
• The feeling of being unprepared for retirement among middle-class Americans is increasingly common, exacerbated by the reality that many live paycheck to paycheck.

These pressures are causing Americans to reassess what middle-class life entails, with many feeling that traditional benchmarks, such as owning a home or achieving financial independence has slipped completely out of reach.

Truths and Myths

The Economy Is Actually Stronger Than It Seems - For many Americans there is a disconnect between the macroeconomic signals and individual experiences that highlights the gap in perception. Many Americans continue to feel financially strained, largely because navigating economic shocks like the pandemic and fluctuating interest rates has left them exhausted and far less optimistic about their financial future.

Despite the challenges, economists argue that Americans may be underestimating the strength of the U.S. economy. While inflation has undoubtedly increased living costs, for many workers, wage growth has actually outpaced inflation, providing a bit of a cushion against rising prices.

Consumer Spending: Despite inflationary pressures, consumer spending remains robust in several sectors.

Job Market Resilience: Unemployment rates remain low, and many industries are experiencing strong job growth.

Wage Increases: Median wages have risen steadily, with many workers benefiting from pay adjustments that outstrip inflation.

Economic Growth and Productivity

The U.S. economy has shown remarkable resilience and strength in recent years, despite facing significant challenges, and outperforming many other developed economies. While inflation has undoubtedly impacted household budgets, there are several indicators suggesting the economy is performing far better than many Americans perceive.

The U.S. economy has demonstrated robust growth, with real GDP expanding at a 2.9% annualized pace over the past eight quarters.

Notably, U.S. real GDP is now 8.7% higher than at the end of 2019, outpacing other G7 economies like Canada (5.5%), France (3.7%), and the UK (2.9%)

A key driver of this economic strength has been a productivity boom. With productivity increasing at 2.7% year-over-year, the U.S. is actually experiencing its best gains since the personal computer boom of 1995-2004

The U.S. job market remains exceptionally strong, with the unemployment rate continuing at nearly a 50-year low. Job creation has consistently exceeded expectations, with the economy adding an average of 150,000 to 175,000 new jobs per month

Inflation

From 1950 to 1975, the average annual inflation rate in the United States was approximately 4.1%, based on data from the Consumer Price Index (CPI). However, this period saw significant variation in inflation rates, influenced by post-war recovery, economic expansion, and the oil crisis of the 1970s.

1950s: The average inflation was relatively low, around 2% to 3% annually.

1960s: Inflation began creeping up, averaging about 2.5% to 3.5%.

1970s (Early Years): Inflation accelerated significantly, averaging over 6% annually between 1970 and 1975.

From 1976 to 2000, the average annual inflation rate in the United States was approximately 4.0%, based on the Consumer Price Index (CPI).

Late 1970s–Early 1980s: ("The Great Inflation"): Inflation surged, averaging 8% to 10% annually during this time, peaking at 13.5% in 1980.

Mid-to-Late 1980s: Declining Inflation: By 1983, inflation fell to around 3–4% annually and stabilized in this range throughout the decade.

1990s: The 1990s marked a period of economic growth and inflation stability, with rates averaging around 2–3% annually.

2001 to 2023: The average annual inflation rate was approximately 2.2%. Inflation rose significantly in 2021 and 2022, peaking at around 7% in 2022

The peak inflation rates seen in 2021 and 2022 likely established a new price floor for many goods and services. The pandemic exposed vulnerabilities in global supply chains. Companies are now investing in more resilient, often localized production systems, which has led to higher costs that are passed on to consumers.

• While central banks have tightened monetary policy, reducing inflation somewhat, these measures don’t roll back prices. Instead, they slow the rate of increase, leaving prices at their elevated levels.
• Sustained higher prices for energy and raw materials, have cascaded through the economy.
• Higher level of prices, it becomes embedded in economic behavior.

This means today’s prices are likely here to stay, with only modest changes going forward.

While inflation has undoubtedly increased the cost of essentials, there are signs of improvement. The current U.S. inflation rate, as of October 2024, is 2.6% year-over-year. This is a slight increase from 2.44% in September 2024 but represents a significant improvement compared to higher inflation levels seen in 2022 and 2023.

Challenges and Disparities

Despite these positive indicators, it's important to acknowledge that economic challenges persist for many Americans. The benefits of economic growth have not been evenly distributed, with college-educated workers generally faring better than those without degrees. Additionally, while wage growth has outpaced inflation on average in certain areas, many households still struggle with the increased costs of essentials like food, housing, and healthcare. While the impact of inflation on household budgets is real and significant for many Americans, economic data indicates that the U.S. economy remains fundamentally strong and resilient and is performing much better than public perception might indicate.

Housing – Truths and Myths: One of the most visible impacts of inflation on middle-class life is the struggle to afford a home. Record-high home prices are making it difficult for first-time buyers to enter the market. Since 1991, home prices have grown much faster than wages. Median home prices were around $120,000 in 1991 and exceeded $400,000 by 2024, significantly outpacing inflation and income growth.

A Little History …

From 1950 to 1975, home prices did not grow much faster than wages, especially when compared to more recent decades. The post-World War II era through the 1960s was a period of relatively stable home price growth, keeping pace with wages. It wasn't until the 1970s, driven by inflation and increased demand, that home prices started rising more rapidly, outpacing wage growth.

1950-1975 Home prices grew at a similar pace to wages, ensuring relative affordability.

• Home Prices increased moderately, from $7,400 (1950) to about $37,000 (1975).
• Average annual income rose from $3,300 (1950) to $12,000 (1975).

1976-2000 Home prices outpaced wages, beginning a trend of reduced affordability.

• Home Prices surged from around $37,000 to $150,000 by 2000.
• Wages grew more slowly, from $12,000 to about $40,000 by 2000.

2001-2023 Home prices skyrocketed, driven by low rates, speculative buying, and limited supply, while wages lagged behind, leading to significant affordability challenges.

• Home prices soared from $150,000 in 2001 to over $400,000 by 2023.
• Wages grew from about $40,000 in 2001 to $55,000 by 2023.

Perspective:

1950 to 1975, first-time homebuyers had more modest expectations regarding the size and location of their homes. Many buyers were willing to settle for smaller homes or less desirable neighborhoods due to more affordable prices and lower expectations for amenities.

1976 to 2000, first-time homebuyers' expectations evolved significantly. As the economy grew and incomes rose, buyers were less willing to settle for smaller homes or less desirable neighborhoods. They began to prioritize larger homes, better locations, and modern amenities. This shift reflected an increased focus on comfort, convenience, and lifestyle.

2001 to 2023, first-time homebuyers significantly raised their expectations. Larger homes, better locations, and more modern amenities became essential, reflecting an even stronger focus on comfort, convenience, and lifestyle. This shift was driven by rising incomes, and a growing desire for more luxurious living spaces

Mortgage Rate Increases: It is the perception by many that mortgage rates are hovering near historic levels making monthly payments unaffordable for many.

Reality Check: Over the past 30 years, the average 30-year fixed mortgage rate in the U.S. has been approximately 6-7%. Over the past 40 years, the 30-year fixed mortgage rate has only dropped below 3% one-time (almost 20 months) July 2020 to March 2022. This was an unprecedented occurrence. Before this brief period a 30-year fixed rates had never fallen below 3% in recorded history.

Mortgage rates peaked above 16% in the early 1980s but gradually declined to around 9% during the 1990’s. From 1991 to 2019, the average 30-year fixed mortgage rate in the U.S. was approximately 6.25%.

Extended Savings Timelines: Surveys reveal that many first-time buyers expect it will take them at least eight years to save for a down payment, a timeline that delays the dream of homeownership.

1950-1975: Home prices and wages grew relatively similarly, making it more achievable for first-time buyers to save for a down payment in a shorter period—typically a few years.

1976-2000: As home prices began outpacing wages, saving for a down payment became more challenging, extending the timeline for many, but it was still achievable in a reasonable timeframe (around 5 years).

2001-2023: With rapid home price increases and stagnant wages, the timeline for saving grew considerably longer, now averaging 8 years or more.

This housing crisis underscores the broader financial pressures facing the middle class and the need for creative solutions to regain a sense of security.

A Resilient Future

The middle class in America are undeniably facing a period of transformation. Inflation has altered traditional assumptions about financial stability, homeownership, and retirement planning. However, these challenges also present an opportunity for Americans to reassess their financial habits and adopt strategies to build resilience.

While the path forward may be daunting, careful planning and a willingness to adapt can help middle-class households navigate economic uncertainty and redefine what it means to achieve the American Dream in today’s world.

By focusing on long-term planning, leveraging economic strengths, and addressing financial anxieties head-on, Americans can ensure a secure and fulfilling future—regardless of the challenges inflation presents.

Navigating Financial Anxiety

While inflation poses significant challenges, experts emphasize that financial planning can help mitigate stress and uncertainty. Wealth advisors suggest the following strategies:

Create a Budget: Track expenses to identify areas where spending can be trimmed without compromising essential needs.

Set Clear Goals: Define long-term financial objectives, such as retirement savings or purchasing a home, to stay focused and motivated.

Invest Wisely: Seek advice on investment opportunities that can hedge against inflation and build wealth over time.

Emergency Savings: Prioritize building an emergency fund to cushion against unexpected expenses or income disruptions.

Consult Professionals: Engage with financial advisors who can provide personalized guidance tailored to individual circumstances.

By taking proactive steps, middle-class families can regain a sense of control and work toward achieving their financial goals despite inflationary pressures.