The US Federal Reserve is primed to avoid a once inevitable recession as it looks to ease benchmark interest rates this year if inflation returns to policymakers' long-term goal. For millions of Americans at the lowest income rungs, however, the economic "soft landing" has been anything but.

The wealth gap between the richest 1% and poorest 50% of Americans reached a record $40.917 trillion at the end of 2023, according to the latest Fed data. While both groups are wealthier now than at the start of 2020, the more than $14 trillion gain for the richest Americans during that time dwarfs the roughly $1.7 trillion increase for the poorest group. Wealthy Americans have seen significant gains from the rallies in stock and housing prices, assets now even further out of reach of those in lower income brackets with interest rates likely to stay at relatively high levels well into next year.

While the Fed continues to try to cool the post-pandemic economy without spiking unemployment or re-accelerating inflation, the poorest Americans are bearing the brunt of higher prices and borrowing costs. They have seen prices for their most frequently purchased goods and services rise faster than their wages, they are far more stressed about the climbing costs of gasoline, food and rent than wealthier Americans, and they have increased their debt to record levels.

"These households don't have any excess savings left and they haven't benefited from the massive runup in stock prices and home values," said Oren Klachkin, a financial market economist with Nationwide. "These tailwinds have only benefited higher income households, who are fundamentally less exposed to pressures from inflation. All of this is a reminder of the fissures beneath what looks like a strong economy at the headline level."

Wages rise as costs 'can only scale up so much'

The Fed is prepared to cut benchmark interest rates, which have sat at a decadeslong high since July 2023, as inflation and a hot job market are cooling. Consumer prices rose 3.4% annually in April, well below the 2022 peak of 9.1%, and are trending closer toward the long-term 2% target.

Rising wages, particularly in lower-paid industries facing intense labor demand, have shielded the poorest Americans from the worst of inflation's bite. The average wage for leisure and hospitality workers was up 33.1% in April from the same month in 2019, faster than the corresponding 22.7% rise in the consumer price index over the same window, according to the latest government data.

By comparison, wages have risen about 7.6% for the average tech worker. That group sits at the higher end of the pay scale, earning roughly double what the average hospitality or retail worker makes per hour.

Lower-income workers are disproportionally impacted by higher prices compared to better-paid Americans. In a May paper, the Congressional Budget Office analyzed the spending of Americans in five income groups, finding that prices on the most frequently purchased goods and services for households in the bottom 20% of income, particularly food and gasoline, increased 4.7% each year from 2019 to 2023. Prices for those households in the top 20% of income increased by 4.4%.

"It's a small difference, but over four years that means prices went up by a total of 20% for lower-income households, compared to 19% for higher-income households," Faucher said. "So prices are up for all households, but are up by a little bit more for lower-income households."

These lower-income households have few alternatives as they struggle to pay more for gas, rent and groceries, said Matthew Darling, a senior employment policy analyst at the Niskanen Center.

"Both the rich and the poor are seeing their expenses go up," Darling said. "But the poor have a real lack of optionality."

Wealthy Americans are able to maintain and repair cars, and can put off the purchase of a new car — or pay for a new one with cash. But lower-income workers whose vehicles are broken beyond repair may have no other choice than to pay for one at the new price level. A high-salaried tech worker able to work remotely may decide to move to a region with a lower cost of living, but a lower-paid bartender may have little choice but to keep paying rising rent without the means to move.

Budget cuts at the grocery store may not be possible for a lower-income family that has lived on rice and beans for years, Darling said.

"Everybody needs to buy groceries, but it can only scale up so much," Darling said.

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'Hitting a breaking point'

The lack of options has caused poorer Americans far more stress than higher-paid workers. Roughly 56% of households making less than $25,000 a year claim that higher prices have been "very stressful," while just 4% said they were not stressful at all, according to a recent survey by the US Census Bureau.

By comparison, less than 20% of households with incomes above $200,000 described higher prices as being very stressful, with more than 15% saying they were not stressful at all, according to the Census survey.

As prices have risen so has debt. Credit card balances reached $1.12 trillion in the first quarter of 2024, a 26% increase in five years, according to the latest data from the Federal Reserve Bank of New York. Auto loans climbed to $1.62 trillion in the first quarter, up 27% from five years prior.

"This is a sign that lower-income households are hitting a breaking point," said Michael Crook, chief investment officer at Mill Creek Capital Advisors.

Elevated inflation and higher debt services costs are overwhelming wage gains over the past few years, increasingly pushing lower-income households with high credit card utilization rates into delinquency.

"The average credit card rate is now over 24%, which is an impossible rate to keep up with for families that were only paying the minimum to start with," Crook said.