Arriving just a few days after new research showed the volume of consumers living paycheck to paycheck, the Capital One Insights Center released new research timed to the two-year anniversary of the COVID-19 pandemic that shows the gap between lower and higher earners continues to widen against new affordability pressures.

As part of the Capital One’s ongoing Marketplace Index survey, this latest research released on Monday delved into the disproportionate impact of the pandemic across income groups against the backdrop of rising inflation.

Two years into the pandemic, what experts described as the K-shaped recovery is continuing, with the gap between lower and higher earners continuing to widen fueled in part by inflation.

Since the Marketplace Index’s first release six months ago, Capital One pointed out that Americans have confronted a host of new challenges — from the surge of the Omicron variant, to the expiration of key government relief programs and stimulus, and now rising inflation.

“This has placed increased pressure on the financial health of millions of Americans, with lower earners facing disproportionately negative impacts,” Capital One said in a news release.

Top findings

Comparing the early months of the pandemic to February, data shows that:

— Underemployment: Capital One defined this metric working less than preferred or for less money than before the pandemic. Analysts found underemployment has shown a marked improvement compared to April 2020. However lower earners have not recovered at the same rate.

For middle earners rates of underemployment dropped by 14 percentage points (21% in April 2020 vs 7% in February 2022), by 10 points for higher earners (13% vs. 3%), and just four points for lower earners (Nat Rep: 22% vs. 18%).

—I ncome: While fewer middle and higher earners have reported a decrease in income since April 2020, Capital One said a slightly greater share of lower earners have reported additional decreases (33% in April 2020 versus 35% in February 2022).

— Bill payments: Since August, Capital One said there has been a slight increase in Americans who were unable to pay some or all of their bills in the past month across all income groups (11% in August versus 13% in February), with lower earners struggling the most (20% versus 22%).

— Financial health sentiment: Capital One found Americans’ sense of their current financial health has fallen to early pandemic lows across income groups, driven largely by falling sentiment among lower earners (42% of lower earners reported that they do not feel financially healthy in April 2020 versus 47% in February).

More insights involving inflation

Capital One determined lower earners continue to face outsized economic hurdles, impacting not only their financial — but physical, mental and emotional health — at roughly two times the rate of higher earners.

The research showed nearly half of lower earners (47%) said their current financial situation impacts their mental and emotional health negatively, and 39% report negative impacts to their physical health — at nearly two times the rate of higher earners.

Against the backdrop of rising prices, Capital One indicated roughly one-in-four Americans were unable to pay for at least one bill in the past month.

In February, the research uncovered that roughly one quarter of consumers (26%) were unable to pay at least one bill while 27% borrowed in some way to pay bills or make ends meet. Nearly half (47%) are concerned about paying at least one bill in the next month.

As concerns over inflation increase, Capital One found about six in 10 Americans report that rising prices have affected their spending, leading to cuts in discretionary purchases. The majority of respondents (62%) reported that inflation affected their spending recently, with lower and middle earners most affected.

As a result, analysts said more than one-third of lower earners are making significant cuts to their travel, entertainment and dining spend (ranging from 33-37% across the aforementioned categories) compared to much lower rates among higher earners (9-17%). 

Capital One mentioned the vast majority of Americans don’t think wages have kept up with inflation, with lower earners falling furthest behind in non-performance-based increases.

According to the new research, only 18% of consumers said their wages have fully kept up with their cost of living, with only 9% of lower earners reporting the same.

Meanwhile, 10% of lower earners got a non-performance based raise or bonus in the past three months versus 20% of middle earners and 30% of higher earners, according to Capital One, which said, “these disparate impacts are even more pronounced when considering the already pronounced difference in wages across all three income groups.”

To compensate for rising prices, analysts pointed out that some Americans are turning to other funding sources, like savings or borrowing.

The research found that nearly half of consumers (45%) took proactive measures to spend less such as cutting back on discretionary spending and canceling/not taking trips. Analysts added that more than half of consumers (58%) took a hit to their longer-term financial health like saving less, tapping into savings, borrowing money and taking out a loan.

Tax refunds are expected to be a boost for considerable shares of Americans, with the IRS noting last month that the average refund is more than $2,300.

Capital One said nearly half (47%) of respondents expect a refund after filing their 2021 taxes, with nearly half of lower earners (43%) and 3 in 10 middle earners (30%) saying their tax refunds would be very or moderately important to their overall financial health this year.

Nonetheless, Capital One noted that working Americans across the earnings spectrum report increasing income.

In February, the research indicated more working Americans reported their income increasing (43%) than those who reported a decrease in income (27%), largely from year end bonuses (10%) and merit-based raises from their same job (14%) and/or from working more hours (18%).

Despite increasing concerns over affordability among middle and higher earners, Capital One highlighted that there is considerable hope for their financial future.

The research showed middle and higher earners express hope for their financial futures: 31% of middle earners and 45% of higher earners are more optimistic about their financial futures than they were pre-pandemic; and 77% of higher earners and 48% of middle earners report feeling confident about saving for their long-term goals.

A smaller share of lower earners expressed a similarly positive view (27%).

Research background

The Capital One Insights Center combines Capital One research and partnerships to produce insights that advance equity and inclusion. As a nascent platform for data and dialogue, the center strives to help changemakers create an inclusive society, build thriving communities and develop financial tools that enrich lives.

Capital One mentioned the Marketplace Index is one of the longest-running surveys on the social and economic effects of COVID-19 to date by a private sector enterprise, having run surveys of 2,000 to 10,000 Americans every four to eight weeks since April 2020.

Ahead of the forthcoming Federal Reserve’s interest rate decision next week, the study addressed consumer sentiment on topics impacting Americans’ financial health today.

“Americans believe their financial health has declined to levels not seen since early in the pandemic,” said Melissa Bearden, head of consumer intelligence at Capital One. “For those earning the least, the last two years of uncertainty and rapid change are creating worrisome financial realities.

“Coupled with the current backdrop of rising inflation, bill payment rates continue to decrease across all income levels and many consumers say that they are struggling to cover the cost of household staples,” Bearden continued in a news release.