74% of middle class Americans have cut back on non-essential spending due to inflation

74% of middle class Americans have cut back on non-essential spending due to inflation.

Consumer sentiment, a measure of Americans' economic outlook, has reached a six-month low, according to the University of Michigan's closely monitored index. This drop, the largest since 2021, underscores the ongoing impact of inflation on household budgets and heightens concerns about rising prices, unemployment, and interest rates potentially worsening in the coming months.

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This growing pessimism is influencing consumer spending habits. Companies like McDonald’s, Home Depot, Under Armour, and Starbucks recently reported disappointing earnings as people cut back on fast food, home improvements, sneakers, and afternoon lattes. Retail sales were flat in April after modest increases in February and March. However, Walmart reported a strong first quarter, buoyed by high-income shoppers, according to executives.

Gas prices, despite easing in recent weeks, have risen overall for the year, just as the busy summer season approaches.

"For the last couple of years, the economy has been driven by household spending, and now people are starting to say, 'Let’s retrench here,'" said Jeffrey Roach, chief economist for LPL Financial. "The pressure from inflation has finally started to hit even upper-income households."

Although the economy remains strong, it has slowed in recent months as the Federal Reserve works to control inflation. Employers are adding fewer jobs, wage growth has decelerated, and Americans are postponing major purchases like homes, cars, and appliances.

This economic slowdown could impact the upcoming presidential election and pose challenges for the Biden campaign, which has struggled to convince Americans that the president's policies have improved their financial situations.

Polls consistently show that Americans favor former president Donald Trump over Biden on economic issues. In April, about 36 percent of Americans identified the economy as the country’s top issue, up from 30 percent in February and March, according to Gallup polls. Additionally, more people cited inflation and the high cost of living as major concerns compared to the previous month.