In the United States, workers are getting poorer as prices rise, but big tech firms are booming via the AI bubble, hence the economy’s K-shape.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
The Financial Times points out that, on the campaign trail last year, Donald Trump vowed to “immediately bring prices down, starting on Day One”. Yet, since his return to the White House in January, inflation has remained elevated. As a result, Trump’s approval rating has slipped, weighed down by concerns over the cost of living. However, last Wednesday, he claimed America’s cost of living worries are a “con job” and a “hoax” perpetuated by Democrats.
The annual growth in the US personal consumption expenditure price index, which is the price index that the Federal Reserve follows for its interest-rate policy decisions, rose to 2.8% in September, up from 2.3% in April, when Trump unveiled his sweeping import tariffs on so-called ‘Liberation day’ – liberation for prices only.
Since then, despite the swings and roundabouts of Trump’s tariff decisions, goods import duties have risen and pushed up the prices of trade-dependent goods, including cars and clothing. They have also contributed to higher food and drink prices, including for beef, coffee and some fruits. Likewise, duties on raw materials including copper and timber are filtering into the cost of residential building work, just as the US house-price-to-income ratio is near an all-time high.
Also, Trump’s vicious anti-immigration crackdown has led to severe shortages of labour in low-paid farming and construction. This is pushing up food and building prices. And above all, there has been a huge rise in electricity prices, driven by surging demand from energy-hungry AI data centres. OpenAI uses as much electricity as New York City and San Diego combined, or as much as the total electricity demand of Switzerland and Portugal combined.
Rising inflation is one thing. But it is being accompanied by a weakening jobs market as employment growth slows to a trickle and wage rises, especially for the lower paid, have slowed. Unemployment among Hispanic workers — who swung significantly towards Trump last November — rose to a year-high of 5.5 per cent in September, compared with 4.4 per cent overall.
The New York Federal Reserve real GDP forecast for the final quarter of this year is an annualised 1.7%, or about 0.4% up on Q3. That’s a significant slowdown from Q3. Thus, the signs of stagflation – rising inflation and slowing growth – persist.
Atlanta Federal Reserve analysis of Bureau of Labor Statistics data show that, after years of above-trend growth, pay for America’s lowest earners has slowed more sharply than for the highest — erasing much of the progress made during the past decade in closing the gap. The federal minimum wage remains at $7.25 since 2009, affecting 1.3 million workers, as noted by the Department of Labor. Union membership fell to 10.1% in 2022, the lowest on record, weakening bargaining power in industries like retail. Meanwhile, the US stock market continues to hit new highs as the AI mania alongside the prospect of cuts in interest rates and corporate profits tax feed the frenzy among the elite.
In contrast, the richest 1% of households in the United States have accumulated almost 1,000 times more wealth than the poorest 20% over the last three and a half decades, and economic inequality is getting worse at a rapid pace, new research shows. Over the past year alone, Oxfam noted, the wealth of the 10 richest U.S. billionaires soared by $698 billion. That means that the top 0.1%’s share of total wealth is now at a record high of 12.6%. The top 1% of earners control more than one-fifth of all income, while the bottom 20% of Americans share just 3.1% of total income. This represents a 20-to-1 ratio between the income shares of the highest and lowest quintiles, demonstrating the extreme nature of current inequality levels.
This contrast is called a ‘K-shaped’ economy, where those at the bottom lose and the already well-off gain more. Recent figures point to a pronounced ‘K-shaped’ economy, as the weak jobs market and stubbornly high prices widen the difference between the top and lowest earners. US growth is largely dependent right now on AI and AI-related capex driving wealth.
Poorer households have been hit by weaker wage growth and a slowdown in hiring. Under the Trump’s budget, the One Big Beautiful Bill Act, many lower income Americans will lose food benefits support and subsidies for health insurance. No wonder, consumer sentiment among the bottom third of earners has dropped to its lowest on record. The CB’s Consumer Confidence Index fell sharply in November and, on a six-month moving-average basis, consumers earning under $15,000 remained the least optimistic of all income groups.
During McDonald’s most recent earnings call, Christopher Kempczinski, chief executive of the fast food chain, said he continued to “see a bifurcated consumer base with . . . traffic from lower income consumers declining nearly double digits in the third quarter, a trend that’s persisted for nearly two years”. Kempczinski, citing high rent, food and childcare costs, said the low-income consumer had been forced to absorb some “significant inflation”, and “I think that’s affecting their outlook and their sentiment and their spending behaviour”.
Many Americans ‘feel’ financially strained. Inflation has significantly eroded purchasing power, with average prices rising 23% since 2020. Housing costs have skyrocketed, making homeownership increasingly unattainable.
Healthcare expenses continue to burden American budgets. The Kaiser Family Foundation reported that average family health insurance premiums rose to $23,968 in 2023, a 20% increase from 2019. In 2022, medical debt affected 41% of U.S. adults, totaling $220 billion nationwide, as noted by the Consumer Financial Protection Bureau. A Commonwealth Fund survey in 2023 found that 25% of Americans skipped needed care due to costs, despite employer-sponsored plans covering more workers.
College tuition and fees have increased 179% from 1980 to 2023, adjusted for inflation, according to College Board data. Public four-year universities averaged $10,662 annually in 2023. Total student loan debt reached $1.7 trillion in 2025, held by 42 million borrowers, with the average borrower owing $39,000. Monthly payments resumed at $300 for many after the 2023 pandemic pause. In states like California, in-state tuition at UC Berkeley hit $14,746 for the 2023-2024 academic year, contributing to delayed homebuying among graduates.
Student debt has reached $1.8trn. Debt continues to linger into adulthood, delaying major life milestones. 20% of American adults with an undergraduate degree have student loan debt. Borrowers aged 25-34 carry an average debt of $33,000, with those aged 35-49 holding and average $46,000. This debt has delayed milestones like marriage and parenthood, with 16% of payments in default or forbearance. The Supreme Court’s 2023 decision to strike down President Biden’s $400 billion loan forgiveness plan left millions without relief, exacerbating financial stress in high-cost areas like Boston.
Rising consumer debt is adding to financial pressures. Credit card debt hit $1.3 trillion this year, with average balances at $7000. The increase is driven by rising costs for streaming services and gadgets. Auto loan delinquencies and repossessions are also surging once again, with several indicators surpassing levels not seen during the Great Recession.
The President is likely to campaign for the mid-term congressional elections next year in part on his so-called “big, beautiful” bill, which passed in July, but is only set to come into force in 2026. While the bill maintains tax cuts unveiled during the president’s first term in the White House, it also imposes cuts to Medicaid and food stamps. The Congressional Budget Office said the bill would probably lower households’ resources in the lowest decile of the income distribution by $1,600 per year — compared with a rise of about $12,000 for the top 10 per cent
“Folks are going to get kicked off Medicaid, while the middle class are going to see their Obamacare premiums rise by quite painful amounts,” said Justin Wolfers, an economics professor at the University of Michigan. “Even if the aggregates rise and the size of GDP growth is positive, working- and middle-class Americans may find themselves in a recession where their incomes are falling.”
Moreover, the official measures of price inflation are hugely biased downwards. Corbin Trent has analysed real incomes in the US using a different measure of price inflation. The US government statistics show average real wages have increased 252% since 1950. But Trent argues that actually real incomes have lost 61% of purchasing power in 1950. Why is this? It’s because the official statisticians ‘adjust’ the prices of many goods to take into account their improved productivity i.e better performance. These ‘hedonic’ adjustments cut roughly 50-60% off actual inflation, Trent argues. Also. the ‘basket’ of goods and services is biased towards goods where prices are falling and away from services where prices are rising. Trent “Sure. Electronics got cheaper. I can buy a 55” TV for $300. My grandpa’s 19” black-and-white cost $200 in 1950. That’s equivalent to $2,400 today. But while the TV got cheaper, everything that actually matters got more expensive. You can’t live in a flat-screen TV. You can’t raise kids on a smartphone. You can’t retire on streaming subscriptions.”
Instead, Trent analysed income after inflation according to the hours of work necessary to buy goods and services. “ I stripped away the statistical games. No hedonic adjustments. No theoretical rental equivalents. No basket reweighting. Just straight math. How much do we make and how much do the basics cost? I looked at official government data. Median incomes from the IRS and Census Bureau. Actual prices for essentials from HUD and federal records. Then I asked one simple question. How many years, weeks, or months of work does it take to buy what we need?”
In a way, Trent uses a Marxist approach to the impact of price inflation on incomes, ie based on value as measured by hours of work; how much labour time is needed to purchase goods and services. Doing that reveals that to match the essentials that Americans’ grandparents could actually buy in 1950, 2023’s official median income of $42,220 would need to be $102,024.
This is a similar approach to the analysis of inflation that G Carchedi and I have been working on over the last year or so. Our results are due out in an upcoming paper in the Historical Materialism journal. Instead of estimating inflation according to the US official data, we measured inflation rates as the difference between the expansion of money supply in the economy (adjusted for hoarding) and the change in hours worked by workers in the productive sectors of the economy. This ‘value rate of inflation’ (VRI) was much higher than the official data show. That means that the official figures for the increase in average real incomes are biased sharply upwards.
According to official data, US real median family income rose 62% from 1960 to 2024, but when given the value rate of inflation to deduct, real income was lower by 20% compared to 1960. Indeed, only the so-called golden age of 1960-73 did real incomes rise on the VRI measure. In the neo-liberal period, 1974-00, real incomes fell 14% and in the period of the long depression (2000-19), incomes declined another 10%. In the post-pandemic period, there was virtually no increase, even on official data.. No wonder most Americans feel depressed.
The debate about the causes of inflation in modern economies continues. Recently, former Bank of England governor Mervyn King reversed his previous views and admitted that “Central banks no longer have a theory of inflation,” he told a Harvard seminar. “The current popular characteristic of inflation targets is totally different from [their] original purpose.” The economist Milton Friedman used to argue that “inflation is always and everywhere a monetary phenomenon”, shaped by central bank money creation. However, this monetarist approach is limited “since the velocity of monetary circulation can change and private players create money.” The favourite answer now is to argue that rising inflation is caused by ‘expectations’ that prices will rise. This weird psychological theory is really an abandonment of any explanation. As King commented: “This is the King Canute theory of inflation,” invoking the 11th-century English monarch who is purported to have tried — and failed — to control waves with words, “Or, to use another metaphor, shamans, using verbal intervention to shape prices.”
Coincidentally, the Bank of England has put out a huge paper by Michael Bordo of the Bank for International Settlements that purports to explain inflation as due to changes in the fiscal policy. “Our analysis suggests that the roots of the Great Inflation start in the 1950s and 1960s with the failure of ‘go stop’ policies and government planning to alleviate the fundamental weaknesses on the supply-side of the economy, which were increasingly becoming apparent.” So inflation was not caused by too much money supply (Friedman), or too high wages and ‘tight’ labour markets and trade union pressure (Keynesian), or by uncontrolled expectations (ECB), but by governments spending too much and central banks financing it in a desperate effort to revive a slowing economy. Bordo interprets this as a ‘fiscal cause’ of inflation. Yet the very quote above suggests that it is a supply-side issue that kicked off inflation in the 1960s. Profitability started to fall, real GDP growth slowed and governments and central banks tried to compensate with more spending and monetary injections that only fuelled inflation.
Indeed, after a mountain of pages and graphs, the authors of the paper do not seem to reach any significant conclusion. Inflation, it seems, took place because the supply-side of the UK economy was unproductive and could not deliver “a low-inflation economy capable of delivering sustained growth.” But it was also due to governments not controlling their budgets and central banks not judging correctly how much money supply was being injected into the economy. “This leads us to more fundamental questions in the conclusion to this paper. How much of the inflation experience was inevitable given the collapse of Bretton Woods as a disciplining device, the structural supply side problems facing the UK and the openness of the economy, making the UK vulnerable to shocks from abroad? How much of this was a failure of the institutional framework of monetary and fiscal policy in the UK to adapt to those changes quickly enough? How much was it the slowness of policymakers and politicians to grasp and absorb the major changes in economic thought occurring in the 1960s?” Answers to these questions, there were none.
Another commentator, Giles Wilkes, who used to advise the UK government and the BIS, did have an answer of sorts. He disagreed with Mervyn King that mainstream economics could not explain inflation. Taking Milton Friedman’s famous formula that MV=PT, where M is money supply, V is the velocity or turnover of money supply, P = prices and T = income/production, he says it’s simple: P=MV/T, so if MV rises more than T, then P rises. “We know what causes inflation. The economy is a big complex thing, with multiple half-hidden variables playing upon one another, it is hard to ‘see’ in real time, and it is easy for policy to misfire. But something being complicated is not the same as it being mysterious.” Well yes, but this monetary identity does not deliver the cause. Which is the driver of rising P? Is it a faster rising MV or a slower P? This critique of King’s view also fails to provide an answer.
In our upcoming inflation paper, we try to do just that. Inflation is the outcome in a capitalist economy where value growth (measured in hours of work) slows and the monetary authorities try to boost value growth by increasing money supply. That does not happen because central bank policy or government fiscal largesse cannot stimulate the capitalist sector to invest and expand; instead, MV outstrips T and prices rise.
Away from theory and back to reality. Average US prices have risen 23% since 2020, on official data, or 26% on value data. This has led to a fall in average real incomes for Americans, and increasingly so for the lower-paid. Medicare costs are set to rise, food subsidies are being cut, jobs and wages growth are disappearing and inflation is creeping up again. Meanwhile, the stock market booms and shareholders make hay while the sun shines in America’s K-shaped economy.
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