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Families earning $100,000 or more are cutting spending more aggressively. What's happening?

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Higher-income households are feeling the inflationary pinch.

Consumer spending slowed and household finances weakened across all income levels last month. But households earning $100,000 a year or more reported reducing their spending more than less affluent households, according to a report released this week by Morning Consult, a decision intelligence firm.

The report also found that real monthly spending among US adults fell by 4.3% from November to December. Even so, 21.3% of US adults said their monthly expenses exceeded their monthly income in December, up from 19.2% in November.

On average, households earning $100,000 a year or more said they spent about 10% less in real terms in December than the previous month. Families earning $50,000 to $99,999 and those earning less than $50,000 a year, meanwhile, reported that they cut their monthly expenses by no more than 5% on average.

In general, households are reducing spending on recreation, alcohol, car insurance and other services in December, while spending more on hotels, gasoline and airline tickets, according to the report.

A theory about spending cuts: Higher earners typically have more discretionary income and have probably decided to exercise more fiscal caution after seven interest rate hikes by the Federal Reserve last year. (On Wednesday, St. Louis Fed President James Bullard told The Wall Street Journal in a live-streamed interview that the Federal Reserve should not “put on hold” raising its benchmark rates until they are above of 5%.)

The Morning Consult report cited inflationary pressures. “Increased budgetary pressures brought on by persistently high inflation are forcing tradeoffs on consumers, leading to reallocation across categories,” he said. “For example, as food has become more expensive in the past year, American households have accommodated an increase in grocery purchases by spending less at restaurants.”

Early last year, higher-income households led consumer spending in the face of rising prices, said Kayla Bruun, economic analyst at Morning Consult and co-author of the report. But household incomes, even for those earning six figures, haven’t grown fast enough to keep up with inflation, she said.

“They probably started to realize, ‘Hey, I can’t keep buying the same basket of products every month and expect to keep building my savings,’” Bruun told MarketWatch.

At the same time, recent layoffs in higher-income technology and finance sectors may also have affected sentiment among wealthier households, Bruun said.

The technology and financial sectors have felt the brunt of rising interest rates and economic headwinds, she added. Goldman Sachs GS,
and BlackRock BLK,
said earlier this month that they were cutting jobs. Microsoft Corp. MSFT,
confirmed plans on Wednesday to lay off about 10,000 workers, equivalent to about 5% of the company’s global workforce.

Prior to Microsoft’s announcement, data compiled by the website estimated that more than 25,000 global tech industry employees were laid off in the first few weeks of 2023. Last year, approximately 60,000 people in the tech industry were laid off, according to Challenger , Gray and Christmas.

Still, there was some good news: inflation eased in December for the sixth consecutive month: the annual inflation rate fell to 6.5% from 7.1% in November, after reaching 9.1% last summer, the highest high in four decades.

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