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Dollar Stores Are Flashing a Warning Sign About Lower-Income Consumers. WSJ, Jinjoo Lee.

Belt tightening from Customers at Dollar stores.

Inflation has eased, wage growth has been decent and Americans on average still have more in savings than they used to pre-pandemic. Some might even say the economy has reached a much-vaunted “soft landing.” Low-income consumers, though, aren’t feeling any of that.

Dollar stores, a bellwether for that group’s spending, started seeing signs of belt-tightening from their core consumers earlier this year. That trend has only continued into the latest quarter.

They say their customers are waiting to shop for products at the last minute for occasions such as Halloween and spending less toward the end of the month, when their budgets are depleted. Meanwhile, cheap store brands are selling well: Dollar General DG -2.70%decrease; red down pointing triangle said in its earnings call on Dec. 5 that its “value valley” aisle offering $1 items was its top-performing category in its last quarter.

Walmart WMT -0.16%decrease; red down pointing triangle Chief Executive Doug McMillon said at a conference on Dec. 3 that the “inflationary cycle has been really detrimental” for lower-income families, noting that those customers seem to be under stress. Earlier this week, convenience-store operator Casey’s General Stores CASY 0.74%increase; green up pointing triangle said in an earnings call that it is seeing demand softness from lower-income consumers.

The penny-pinching behavior has affected other businesses, too. McDonald’s MCD -0.22%decrease; red down pointing triangle said in its earnings call in late October that more low-income consumers were choosing to eat at home more often, putting a damper on customer traffic. The company said its $5 Meal Deal has been popular, and it plans to extend that deal into December to attract customers. Auto-repair chain Monro MNRO 1.33%increase; green up pointing triangle said in late October that value-oriented consumers are trading down to its cheaper tire options.

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Lower-income households fared relatively well in the few years following the pandemic—a period dubbed the “Richcession”—when the lowest-paid workers saw the biggest wage increases as demand for blue-collar jobs such as those in service and retail surged. Stimulus checks, as well as the temporary boost to food-stamp benefits, also known as the Supplemental Nutrition Assistance Program, helped them amass savings. Businesses catering to them, such as Dollar General and Dollar Tree DLTR -0.30%decrease; red down pointing triangle, saw brisk business and their shares rose from 2020 through 2022, handily outperforming the S&P 500.

Dollar stores’ shares have since lost their gains and now are below their prepandemic levels. Some of that underperformance can be blamed on business decisions, such as Dollar General’s underinvestment in stores, but it also mirrors how the poorest households are faring. Wage growth for the lowest-income Americans has slowed considerably since 2022 and now lags behind that of the highest-income households, according to data from the Federal Reserve Bank of Atlanta. Years of unrelenting price increases are catching up with low-income consumers. Headline inflation numbers, which have ranged from 2.4% to 3.5% this year, don’t quite reflect the basket of items that they spend most of their paychecks on.

Howard Jackson, president of retail-focused firm HSA Consulting, estimates that inflation has actually averaged about 6.3% over the past 12 months for low-income households. Jackson said this estimate adjusts the consumer-price-index basket to weigh necessities—such as rent, utilities and food—higher than things they tend to spend less on, such as cars, furniture, clothes and consumer electronics. His estimate considers what items constitute the food basket, based on surveys of low-income consumers. “If you don’t have much money, you keep your pair of jeans a lot longer. Those are the purchases that get deferred,” Jackson said.

The Bureau of Labor Statistics, which publishes its own estimate of inflation by income quintile, assumes that about 71% of the poorest Americans’ spending goes toward food, housing and medical care. The wealthiest spend about 65% on those bare necessities.

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Notably, price increases have been more pronounced for need-driven categories like rent, medical care and utilities than for discretionary ones such as clothes, furniture and new cars. In fact, new cars and furniture have been getting cheaper on a year-over-year basis since earlier this year.

Inflation’s cumulative burden on low-income consumers becomes even more apparent over a longer time horizon. From December 2005 through June 2024, consumer prices have increased about 64% for the poorest 20% of Americans, according to a report from the Minneapolis Fed, using data from the Bureau of Labor Statistics. The highest-income households, by contrast, have seen prices rise 57%.

In reality, the inflation burden might be even higher for low-income households because they have less flexibility to adjust their spending as prices go up. “They are more likely to devote more spending to household necessities in proportion to discretionary purchases; they are probably already buying low-cost brands,” according to the Minneapolis Fed.  

And inflation doesn’t capture the effect of high interest rates, which might hit low-income households more. Although it is less common for low-income households to have credit cards, those that do tend to carry balances from month to month, accruing hefty interest.

When might poorer consumers start feeling better? Steve Presley, North America chief executive at food manufacturer Nestlé, said last month that inflation will have to “normalize a little more” and wages will have to catch up before low-income households can keep up with the price increases. That might take a while: Inflation actually ticked up slightly to 2.7% in November from a year earlier, up from 2.6% in

Things might not get much easier for budget-constrained consumers next year. SNAP benefits, for example, barely increased for fiscal 2025. A family of four began receiving maximum benefits of $975 a month starting Oct. 1, just $2 more than their allotment last fiscal year. In addition, requirements to qualify for SNAP became more stringent. Able-bodied adults ages 52 to 54 without dependents must start proving that they are actively working, training or in school to qualify for the benefit.

Meanwhile, the cost-of-living-adjustment for Social Security will be 2.5% for 2025, a smaller increase than the 3.2% and 8.7% step-ups that seniors saw in 2024 and 2023, respectively. That increase is offset by the increase they will see in Medicare Part B premiums, which will rise to $185 a person a month, up from $174.70 in 2024.

The earlier postpandemic years were a much-needed catch-up period for low-income households. Those better times have come to an end.

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