For the middle class, fewer gifts under the tree this year

The middle class is paring back on holiday gifts this year, reflecting a widening inflation-fueled spending gap between the country’s wealthiest and everyone else.

Americans with annual household incomes of $40,000 to $100,000 say they expect to spend 20% less on holiday gifts than they did last year, Gallup data shows, even as average household spending is expected to rise. Higher-income families, by comparison, plan to spend an all-time high of $1,578 on gifts, a 6% increase from last year.

That split is part of a growing divide between higher-income families who are spending big and lower- and middle-income households that are straining to cover basics such as groceries, gas and housing. For many, this holiday season—a time of unbridled spending on nonessentials—has become a tipping point, highlighting just how little they have left over to splurge.

“Everyone likes giving gifts this time of year, but we’re seeing income inequality becoming more and more pronounced,” said Monica Haynes, director of business and economic research at the University of Minnesota at Duluth. “That’s changing how and what people can buy.”

Brendan Flanagan, who works in construction in New Jersey, plans to spend about $200 on gifts this year, roughly one-third of what he usually does. Instead of monogrammed gifts and electronics, he’s sticking to gift cards for just a few people this year.

“I’m burned out and tired, dealing with all this inflation,” the 33-year-old said. “The gift budget is smaller, because I’m definitely feeling the squeeze this year.”

Early holiday sales numbers suggest muted enthusiasm for gift-buying this year. Spending at clothing shops, department stores, supermarkets, restaurants and bars all fell between October and November.

“People in the middle are cutting back where they can, choosing cheaper items when they can,” said Ben Ayers, senior economist at Nationwide Insurance. “Households are ending the year on a cautious note.”

In all, 1 in 3 holiday shoppers said inflation will change the way they shop this holiday season, according to a Bankrate survey. And a growing share, 28%, say they are stressed about holiday costs, up from 25% last year.

Although prices across the economy are beginning to stabilize, many families are still reeling from a recent spurt of inflation that has lifted prices by more than 20% in four years. Wealthier households have been able to cushion the blow by trading down to lower-priced goods, dipping into savings or forgoing some luxuries altogether. But for lower- and middle-income families that devote more of their budgets to necessities such as housing, food and gas, there has been significantly less wiggle room.

Since 2020, holiday spending by lower- and middle-income groups has remained fairly flat in contrast to wealthier households, which are spending considerably more, Gallup found. As a result, upper-income Americans now spend about 80% more on holiday gifts than middle-income families do, up from a split of about 50% through 2020.

“It all ties back to inflation,” said Lydia Saad, Gallup’s director of U.S. social research. “Clearly the onset of high inflation in 2021 was a pivot point for lower- and middle-income people to hit the brakes on spending, while those with higher incomes have been able to maintain their usual gift-buying pace.”

Marcy Brown is setting aside about $30 for holiday gifts, significantly less than the $600 she and her husband allotted last year for themselves and their five adult children near Baton Rouge. A couple of unexpected expenses, including a car repair and broken-down refrigerator, recently drained their savings, leaving little for holiday splurges.

“We’re budgeted to the cent this year,” said Brown, 50. “We’ve got groceries in the house, our bills are all paid. We’re at that level of we’re comfortable, but there isn’t room for a whole lot else.”

Her husband, Joe, makes about $45,000 a year managing a campus dining hall. And although his pay has gone up in the past few years, she said it’s been tough to keep up with rising food, gas and utility costs. This year, they’ve whittled down their holiday list to the basics: a hoodie for Joe, muffin tins for Marcy and a book for their 19-year-old daughter.

“We will try to throw together one gift for each of us,” she said. “But other than that, we’re cooking a nice dinner together, baking cookies, playing board games.”

For some, the softening job market is also taking a toll. Derek Auth lost his $62,000-a-year audio and video production job last month. His severance runs out at the end of the year, and freelance work has been tough to come by, so he and his wife are limiting their holiday shopping to a handful of discounted items.

“If it wasn’t for credit cards, we wouldn’t have Christmas this year,” said Auth, 44, who lives near Minneapolis. “We’re buying small gifts for the boys. We might hit up the dollar store, and everything else is going to have to take a back seat.”

The latest burst of inflation has hit lower-income families the hardest. Since 2005, prices for low-income households have risen about 10% faster than the average inflation rate, according to an analysis by the Minneapolis Fed.

Although the median household income after accounting for inflation ($80,610 a year) has risen by about $1,000 since 2020, many families say they still feel like they are slipping behind. Middle-income Americans are quickly working through their savings, JPMorgan Chase data shows. And more are also maxing out credit cards and falling behind on payments.

Near Detroit, Nicole Gubaci says years of higher prices have chipped away at her family’s financial cushion. Last year, they’d been able to splurge: She’d even bought $30 tablets for both of her children. But this holiday season, money is tight. Gubaci is relying on a local food bank for Christmas dinner and cobbling together modest gifts: new tires for her husband’s car, so he can get to his job at an Amazon warehouse; donated winter coats for her kids, 3 and 7.

“We haven’t been able to catch up on bills, and every time the car goes down, it’s another hit,” said Gubaci, 30, who recently quit her job at a grocery store because it was becoming so difficult to find child care, especially for her son with autism. “It doesn’t even feel like the holidays for us.”