The K-shaped economy

What is a K-shaped economy?

It’s a term used by a growing number of economists to describe the two-lane scenario they see playing out in the U.S., in which higher-income
households on the upward arm of the K see their wealth increase while lower-income families are squeezed by stagnating incomes and rising prices. At a broad level, the economy appears healthy, with unemployment hovering at just over 4%, inflation edging down from a pandemic-era peak of 9.1% to about 2.5%, and stock markets hitting record highs. President Trump says Americans are living in a “golden age,” but many don’t feel it. Most industries are in a hiring freeze. Borrowing costs remain high. Inflation remains above the Federal Reserve’s 2% target. And because the top 10% of Americans own 87% of stocks, few people have directly benefited from soaring share prices. Fed data shows the share of wealth held by the richest 1% hit nearly 32% last year, the highest since records began in 1989. The worry with income inequality “is not just where we stand now,” said Beth Ann Bovino, chief economist at U.S. Bank, “but also whether ongoing developments will worsen the situation.”

When did this start?

Rising wealth inequality has been a fact of American life since the 1980s. But it accelerated sharply during the Covid-induced 2020 recession, when white-collar professionals remained employed and worked from home—saving money that would have been spent on commuting, vacations, and more—while mass layoffs at restaurants, hotels, and factories pushed unemployment to 15%. Inequality shrank somewhat when the economy reopened and demand surged, with many now short-staffed companies lifting pay for traditionally low-income jobs. In 2023 and 2024, inflation-adjusted wages for the bottom quarter of workers climbed at 3.9% a year, outpacing the top quarter’s 3.1%. “We had that kind of two-year period where the bottom was catching up,” said Dario Perkins, an economist at consultancy TS Lombard. “Since then, the economy has cooled down again.” Hiring has dropped over the past year, as have pay hikes—for some. After-tax wage growth ticked up 4% year on year for higher-income households, according to a new Bank of America report, but climbed just over 2% for middle-income families and 1.4% for lower-income families. For many in the middle and lower tiers, simply staying afloat now feels like a struggle.

Why is that?

It’s partly because the cost of many essentials has climbed faster than wages, a fact not reflected in headline inflation figures. Prices are collectively up about 25% since 2020, but residential electricity rates are more than 30% higher on average than in 2020—and up by more than 100% for some who live near power-hungry AI data centers. National home prices rocketed 55% in that period, with the median house price hitting $432,700 in mid-2025, which has boosted the wealth of those who own property but put homeownership out of reach for many who don’t. The cost of owning a car—everything from sticker price to maintenance to insurance—has accelerated more than 40%, while groceries are up 30%. About a quarter of Americans today live paycheck to paycheck, spending more than 95% of their income on necessities. “The people claiming prices are lower are not actually buying their own groceries,” said Vanessa Jones, a nurse in Davenport, Iowa, who works two jobs and recently declared bankruptcy after being swamped with medical bills following a cancer diagnosis. As the divide between wealthy and lower-income consumers grows, many businesses are rethinking their target audience.

What are companies doing?

Some are refocusing on premium products. It’s a sensible shift considering that a recent Moody’s Analytics report found the top 10% of earners, those making at least $251,000 a year, account for just over 49% of consumer spending, up from 43% in 2020. Spending on luxury fashion climbed 8% year on year in 2025, and sales of first- and business-class tickets are now propelling revenue and profit for Delta Air Lines, CEO Ed Bastian said in October. Lower-end consumers, he added, are “clearly struggling.” Coca-Cola announced in an analyst call late last year that its earnings were being boosted by high-end brands such as Smartwater. Walmart, meanwhile, is pitching itself at the store of choice for overstretched Americans. In November, then-CEO Doug McMillon told analysts that “upper- and middle-income households are driving our growth”—a sign that Whole Foods or Target shoppers are increasingly trading down and seeking bargains at the discount retailer.

Is the K-shaped economy here to stay?

Mark Zandi, chief economist at Moody’s Analytics, thinks so. “This is not a cyclical or temporary phenomenon,” he said. It’s “structural.” Analysts worry that the boom in artificial intelligence could deepen the divide, with the soaring stock of firms such as AI chipmaker Nvidia benefiting a small sliver of the population but not generating many new jobs. “What we see at the very top is an economy that is sort of self-contained,” said Peter Atwater, an economist at the College of William & Mary, “between AI, the stock market, the experiences of the wealthy.” Then there’s the fear that AI could wipe out many entry-level and white-collar jobs, which would super-charge inequality. An economy based only on top earners, many experts agree, is not sustainable: If layoffs intensify and middle- and lower-income Americans cut back spending, the earning of Big Tech firms—which make up about 32% of the S&P 500’s value—would sink. “You’re talking about the bottom of the K essentially pulling down the top,” said Perkins. There’s also the risk of political unrest, which has accompanied previous periods of dizzying technological change and income stratification. In a K-shaped system, “the top gets insulated enough to become careless,” said venture capitalist Josh Tanenbaum,
while “the bottom gets desperate enough to become combustible.”