There’s a significant spending gap between the generations — an economist explains why

Older generations are splurging. And younger generations aren’t.

According to recent data, consumer spending among Baby Boomers increased 2.2% in May, while among Millennials and Gen Z it dropped 1.5%. This is a sharp contrast to what was seen during the pandemic, when spending among older generations lagged behind younger ones. 

There’s a few reasons a generational gap could be causing this spending gap, according to FIU economist Hakan Yilmazkuday. A professor of economics in the Steven J. Green School of International & Public Affairs, Yilmazkuday breaks down what might be driving this pretty significant difference.

What might account for these differences in generational spending?

Spending is affected by two main factors: income and prices.

In terms of income, many Baby Boomers are getting Social Security payments, which are adjusted with respect to the inflation rate. So, they have more income they can spend. But younger generations may not get any inflation adjustment in their salaries. And they have less to spend.

Regarding prices, the cost of living is higher for younger generations, because many have to work in a certain location, like cities where it may be more expensive to live. In contrast, retired Baby Boomers can live anywhere, and more cheaply, which would reduce their cost of living.

On top of that, many Baby Boomers are already homeowners (and most have already paid off their mortgages). High housing prices may not affect them as much as younger generations that might be about to buy their first houses and subject to high mortgage rates.

And then you have another issue: student loans. Younger generations may still be paying them — and that leaves less money to spend on other things.

Overall, the average Baby Boomer can spend more (as compared to their spending from last year), whereas younger generations may spend less (as compared to their spending from last year).

Have these types of spending gaps been seen in the past?

Yes. Anytime we have inflation, we also have differences in spending. Inflation is very costly for any economy. It causes lower income growth as well as higher inequality across people. In fact, inflation is well known as something that creates inequality between people in the economy (due to prices of different goods and services changing differently). In this current situation, this inequality is between the spending of older and younger generations, but in reality, this inequality can be observed across any two people working in different sectors or locations. For example, any two cities can have different inflation rates. A person working with a stable salary in Miami would be worse off due to higher prices compared to another person working with a stable salary in Minneapolis.

That is why the goal is to achieve price stability. It helps prevent these inequalities.

Could this be a long-term thing or is there a chance it could turn around?

The Federal Reserve System, which is the central banking system of the U.S., is working hard to reduce inflation. This is good for price stability in the long-term, which will stop making the real income of younger generations lower due to high inflation.

Once prices are stabilized, there will be less uncertainty in the economy, which will potentially result in higher consumption and income. With more younger people currently in the labor force, a better economy will bring higher demand for their labor, which will eventually increase their salaries. This income boost will potentially reduce or close the spending gap between generations.