The economy is 'less K-shaped than you think' — and that's bad news for the Fed

Americans at every income level are richer than they were before the pandemic.

That's good news for households and a headache for a Fed that has watched inflation, excluding food and energy, run above its target for more than five years.

Picture the letter K. In a K-shaped economy , the top arm shoots up while the bottom arm slides down.

Apollo chief economist Torsten Sløk says the bottom arm is holding up better than most people think. "New data from the Fed shows that the US consumer is less K-shaped than commonly perceived," he wrote in an Oct. 31 note , pointing to spending growth of about 4% to 5% a year for every income group since 2024. (Disclosure: Yahoo is a portfolio company of funds managed by affiliates of Apollo Global Management.)

The Fed's wealth data backs him up. Household net worth is up more than 70% for every income group since early 2019, by Yahoo Finance calculations, including about 73% for the lowest-earning fifth and 85% for the top 1%.

Of the nearly $84 trillion in new household wealth, the top 20% of earners collected about $63 trillion, or three-quarters. The bottom 20% got about $2 trillion.

Kyla Scanlon, author of "In This Economy?", explained on Yahoo Finance's Market Hang Monday why the economy can look strong even when most people don't feel it. Citing University of Michigan survey director Joanne Hsu, she said, "Spending is one dollar, one vote, whereas sentiment is one person, one vote."

The dollars keep voting at the cash register, and that's the Fed's problem.

A consumer this healthy keeps inflation sticky

"Core PCE inflation is supposed to be 2%," Sløk wrote in a Nov. 1 note . "Unfortunately, it has been 3% for three years, and it is now moving higher."

Core PCE , the Fed's favorite inflation gauge, rose 3.1% in September from a year earlier and hasn't dipped to 2% since early 2021. Sløk estimated last week that about half of that inflation now comes from strong demand, the part higher interest rates can actually help cool down.

So how much cooling would it take? A lot. His model says the Fed would need to lift its benchmark rate to roughly 6.75% by the end of 2027, he wrote in a Nov. 2 note . That's nearly 3 percentage points above today's 3.75%-4% range and would be the highest since January 1991.

The Fed "may be further from its inflation goal than the market currently expects," Sløk wrote.

The next clue arrives with Friday's October jobs report, which will show whether hiring is still strong enough to keep a December rate hike on the table. And since the top of the K owns the most stock, a lasting AI sell-off could cool the big spenders faster than any rate hike.