The biggest economic buzzword of the past few years has been “K-shaped.”
CEOs, economists and lawmakers used the letter K to describe the growing divide between the wealthy and everyone else in America — from housing to gas spending. But it’s now becoming clear that letter might be the wrong way to explain the economy.
A new framework is emerging: the “premium economy” economy.
More Americans have left the cramped, no-frills service of basic economic life and moved into an upgraded section. They can afford nicer flights, better groceries and fancier experiences, but can’t reach the next class of home ownership and comfortable retirement.
Despite a growing chunk of people entering the upper middle class and even becoming millionaires, they feel like they’re falling behind. That’s because owning a home, the defining symbol of middle-class life in America, has drifted out of reach. Retiring like the Baby Boomers — whose wealth has grown faster than younger generations — also seems in jeopardy.
How spending patterns shifted
So people are trading up where they can, spending their rising wages on smaller, attainable perks they can afford in premium class. This shift has punished companies competing entirely on price, such as Spirit Airlines and Dollar General, while lifting the likes of Walmart and United Airlines that consumers perceive as higher quality.
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Consider: Last year, Delta and United accounted for more than 90% of the airline industry’s profits.
“People have been waiting to call the death of consumer, but the consumer is still spending,” said Simeon Siegel, a retail analyst at Guggenheim Partners. “It’s much easier to label everything as a K-shaped economy.”
The numbers behind the shift
This group grew from 10% of families in 1979 to 31% in 2024. According to research from the American Enterprise Institute, that group’s share of income also doubled over the same period. A family of three earning $133,000 to $400,000 per year is now considered this group.
Meanwhile, the proportion of families classified as poor and lower-middle class fell over the past five decades.
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“The whole distribution has moved up,” said Scott Winship, a senior fellow at AEI and co-author of the study. “It undercuts the idea that there’s hollowing out of the middle class.” But nearly 40% of Americans do not own their home, so they missed out on soaring home values after the pandemic. Home prices have since ballooned to five times the average median income, trapping people in place. So these people are redirecting their higher wages to travel, concerts and other fun activities. Retail sales have climbed for three consecutive months, bolstered by a healthy labor market and higher tax refunds.
“The consumer is still spending and working,” Ameriprise Financial chief market strategist Anthony Saglimbene said in a note to clients. “If inflation pressures ease at some point, the ‘K-shape’ in the economy could begin to flatten.”
What the travel and retail data shows
This summer’s travel season is expected to surpass the last two, according to a Bank of America survey. Only around 10% of respondents said they’re considering canceling their trip over high gas prices. Spirit Airlines shut down its operations in part because many of its customers grew willing to pay $30 or $40 more for a little extra legroom, free snacks and better service at larger carriers like United and Delta.
Walmart has also peeled off lower-income customers from competitors like Dollar General. The two retailers share customers and have thousands of stores located close to one another. But Walmart upgraded in recent years — cleaning up stores, sharpening prices and adding speedy curbside pickup and home delivery.
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That strategy helped it grab market share.
Hilton expects its “premium economy” hotel brands such as Spark by Hilton to grow in the coming years. CEO Chris Nassetta recently predicted the US economy will enter a “C-shaped” phase in the next few years, where consumer spending is more evenly balanced across income levels. Lower inflation, lower interest rates and AI investments will eventually help low and middle-income consumers gain spending power and flatten the pattern.
“You are going to see this convergence,” he said.
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