K-shaped dynamics - a pattern in which different income groups move in opposite directions at the same time - became apparent in the late 2024 to early 2025 period. Bank of America (BofA) highlights the scale of that split: the top 10% of households were responsible for roughly 23% of consumption during this window, while the bottom 10% accounted for just 4%.
In a K-shaped economy, one arm of the K slopes upward to mark those enjoying stronger outcomes, and the other slopes downward to show groups facing stagnation or decline. That structural divergence means aggregate demand can come to rely disproportionately on the spending choices of higher-income households.
As BofA puts it, "K-shaped spending makes aggregate demand disproportionately dependent on higher income balance sheets, wealth effects and spending behaviour." The practical result is that headline consumption growth can look robust even as material segments of the population endure worsening conditions.
Evidence of that pattern is visible in recent episodes where lower-income households grappled with rising rents, higher debt burdens, elevated energy costs and softer performance in the labour market - yet overall demand held up because wealthier, service-oriented consumers continued to spend.
Measures such as job growth and consumer sentiment treat all consumers equally, so broader economic activity can continue at pace even when outcomes deteriorate for lower-income groups - provided the K-shaped spending pattern persists.
BofA cites immigration restrictions that produced a slowdown in labour supply as an instance where this dynamic played out: higher-income service spending continued, labour demand ultimately stabilised, and the predominance of service-sector employment helped sustain activity.
The pandemic recovery provides a related lesson. BofA notes that "Pandemic-era fiscal support and excess savings helped fuel a stronger US recovery than the "sluggish" one in Europe. This extended beyond household balance sheets: foreign demand for US assets helped finance large deficits, while strong corporate profitability supported investment and jobs." In other words, fiscal transfers, accumulated savings and external financing combined with corporate earnings to underpin a more forceful rebound in the US.
But the presence of K-shaped outcomes carries risks for economic reading and policy design. BofA warns that "Traditional signals of consumer weakening, such as rising delinquencies or softer hiring among lower-wage workers may coexist with steady overall spending, complicating real time assessments of consumer health from the perspective of the broader economy." Policymakers and market participants relying on aggregate figures may therefore overlook stress concentrated in lower-income cohorts.
BofA characterises today’s K-shaped consumer as the product of higher-income households benefiting from large macro shocks interacting with unequal financial cushions and asset gains. Factors that reinforce the K include higher credit costs and a widening gap between rising rents and largely fixed mortgage payments - effects that BofA attributes to the downstream consequences of Federal Reserve tightening.
Importantly, the firm notes that Fed policy may not be well suited to resolving the unequal pressures causing the K. The divergent experiences on each arm of the K point to different policy prescriptions: higher-income households look more likely to see reflation and a demand boom, while lower-income households confront a milder form of stagflation. In this context, BofA judges the Fed’s recent response as consistent with a gradualist approach.
Fiscal constraints further limit the policy toolkit. With the fiscal deficit at 6%, BofA argues there is limited room for large-scale fiscal measures to offset the distributional effects of shocks such as higher energy prices. Competing fiscal priorities and the risk that demand-driven inflation could rise reduce the ability of policymakers to deploy broad support targeted at lower-income households.
The net effect is a macroeconomic environment in which headline demand metrics may mask important distributional weaknesses, and where the combination of monetary limits and constrained fiscal space makes it difficult to address those weaknesses without trade-offs. Observers and policymakers will therefore need to look beyond aggregate indicators to understand where stress is concentrated and which policy instruments can most effectively address it.
Summary
K-shaped dynamics identified in late 2024 to early 2025 show a sharp divergence in consumption across income groups, with the top decile providing about 23% of consumption and the bottom decile about 4%. This divergence makes aggregate demand reliant on higher-income spending, obscures distress among lower-income households, and narrows the effective options for policy responses given constrained fiscal space and inflation risks.
Key Points
- K-shaped spending places disproportionate weight on higher-income household balance sheets, wealth effects and spending patterns, supporting overall demand even as lower-income households struggle - relevant for consumer-facing sectors and services.
- Episodes such as immigration-driven labour slowdowns and the pandemic recovery illustrate how service-oriented higher-income spending and external financing can sustain activity despite lower-income weakness - important for services, corporate investment, and financial markets.
- Monetary policy alone may be limited in addressing the distributional aspects of a K-shaped recovery; fiscal constraints - including a 6% deficit - reduce the scope for compensatory support targeted at lower-income households.
Risks and Uncertainties
- Masked weakness - Aggregate consumption can hide concentrated financial stress among lower-income households, complicating assessments for policymakers and markets; this affects banking, consumer credit, and retail sectors.
- Policy limitations - The Fed may be unable to correct distributional imbalances created by the K because monetary tools are blunt with respect to inequality; fiscal space is limited by competing priorities and inflation risk, affecting fiscal policy makers and social support programs.
- Cost pressures - Higher credit costs and a growing gap between rising rents and largely fixed mortgage payments could reinforce the divergence, with implications for housing markets, utilities facing energy-cost pressures, and sectors serving lower-income consumers.