Explaining the K‑Shaped Economy: What’s Behind the Divide?

Rajashri Chakrabarti, Thu Pham, Beck Pierce, and Maxim L. Pinkovskiy

In our companion post, we used a new module of our Economic Heterogeneity Indicators (EHIs) to shed light on how recent retail spending growth has been driven by high-income households. This fact is consistent with the popular press’s idea of a “K-shaped economy” in which higher-income households experience faster growth in spending than lower-income households. In this post, we dive deeper into the reasons behind this divergence by analyzing for which goods this trend holds true and ask whether it can be explained by changes in wages, inflation, or wealth. We find that, since 2023, wealth has increased the most for high-income households, while inflation has risen the most for low-income households, with both factors helping explain the fact that real retail spending rose the most for high-income households. In contrast, earnings display a more mixed pattern, though earnings of the highest earners have grown more rapidly than earnings of the lowest earners.

Who Is Buying What?

We first exploit our consumption data to examine the types of goods that contributed the most to the divergent patterns across income groups. In the chart below, we present real cumulative spending growth for two types of goods: necessities (food and gas, top panel) and luxuries (retail spending less autos, food and gas, bottom panel). We see that real spending on luxuries increased cumulatively since 2023 for all three income groups and spending on necessities declined for most groups. Notably, the growth in retail spending has been driven by the growth in luxury spending. We also see that growth of both necessity and luxury spending by income group displayed the same K‑shaped pattern as seen in total retail spending.

K-Shaped Pattern Evident for Both Necessity and Luxury Spending

Sources: Numerator Consumer Spending Data, Consumer Price Index via Haver Analytics, and authors’ calculations.
Note: Real spending uses corresponding demographic food, gas, and luxuries prices.

What’s Driving the Divergence?

Next we consider whether differences across income in wages, real wealth, and inflation have been important contributors to this divergence. Using the Federal Reserve Bank of Atlanta’s Wage Growth Tracker, we examine workers’ wage growth by their wage quartile. The Atlanta Fed observes a panel of individuals and are thus able to define growth as the median percent change in the hourly wages of individuals observed twelve months apart.

In the chart below, although the lowest wage quartile has experienced the lowest wage growth in the past year, we see that this has not always been the case. In fact, in some periods of 2023 and 2024, this group experienced the highest growth out of all the quartiles. Given that the K-shaped spending growth appeared in late 2023 and has persisted since, we suggest that there are other factors besides wages that may explain the K-shaped spending pattern starting in late 2023.

We turn to our EHIs to explore whether differential inflation by income group may be playing a part in this K-shaped economy. In the chart below, we examine differences between each income group (the bottom 40 percent, middle 40 percent, and top 20 percent of the income distribution) and the national average. We see that beginning in late 2022, low-income households consistently faced higher inflation than middle- and high-income households did. Specifically, the lowest-income households have experienced inflation above the national average, restraining their spending, whereas the middle 40 percent and top 20 percent of the income distribution have experienced inflation below or near the national average.

Finally, using data from the Board of Governors’ Distributional Financial Accounts (DFA) we note that there have also been K-shaped growth patterns in household wealth. The left panel below shows cumulative growth in real wealth (where we define wealth as net worth or assets less liabilities) for the bottom 20 percent, the middle 40 percent (the third and fourth 20 percent), the second to top quintile, the top quintile excluding the top percentile, and finally the top percentile by nominal household income. Once again, we deflate nominal net worth using our income-specific deflators. We see that, like retail spending, real net worth has displayed a K-shaped pattern since 2023, with higher income groups experiencing higher cumulative wealth growth, relative to the first quarter of 2023, than lower income groups in nearly every quarter. The bottom quintile was an exception as its net worth grew slightly faster than that of the middle 40 percent. Thus, real net worth of the top percentile grew by more than 25 percent, while that of the middle 40 percent grew by less than 10 percent. This growth in net worth has been driven by large increases in financial assets for higher-income groups and especially the top percentile (right panel below). Given these wealth patterns, it is not surprising that higher income groups also increased their retail spending by more than lower income groups.

K-Shaped Patterns Exist in Wealth and Financial Assets Growth

Sources: Distributional Financial Accounts via Federal Reserve, Consumer Price Index via Haver Analytics, and authors’ calculations.
Notes: Real spending uses corresponding demographic prices.

Looking Ahead

In this post, we have seen that the K-shaped recovery characterizing real retail spending is mirrored to an extent in earnings, but more notably in inflation and especially in wealth accumulation, especially of financial assets. The substantial role played by financial assets raises questions regarding the potential vulnerability of retail spending to a financial market correction. We will continue monitoring differential trends in spending across demographics, as well as their potential explanations, in subsequent releases of the Economic Heterogeneity Indicators.   

Rajashri Chakrabarti is an economic research advisor in the Federal Reserve Bank of New York’s Research and Statistics Group.  

Thu Pham is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Beck Pierce is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Maxim L. Pinkovskiy is an economic research advisor in the Federal Reserve Bank of New York’s Research and Statistics Group.

 
@article{ChakrabartiPhamPiercePinkovskiy2026,
    author={Chakrabarti, Rajashri and Pham, Thu and Pierce, Beck and Pinkovskiy, Maxim L.},
    title={Explaining the K‑Shaped Economy: What’s Behind the Divide?},
    journal={Liberty Street Economics},
    note={Liberty Street Economics Blog},
    number={May 1},
    year={2026},
    url={https://doi.org/10.59576/lse.20260501b}
}

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