Inflation Is Forcing Americans Into Defensive Mode
Peter Reagan

Some economic contradictions are easy to ignore – until they show up in your grocery bill.

We keep hearing that parts of the economy are strong. CEO pay is up. Some headline indicators still look sturdy. Yet millions of American households are quietly doing the opposite of what a “strong economy” is supposed to encourage them to do: cutting back, delaying purchases and lowering expectations.

The current contrasts in our economy

The reality is that, for all of us, our purchasing power is being eaten away by inflation, sometimes slowly, sometimes more quickly, but ever more every day. The Associated Press reports that inflation in April was 3.8% (nearly twice the inflation rate that the Federal Reserve aims for).

That’s almost a full percentage point higher than at the start of this year according to the Personal Consumption Expenditures Price Index put out by the federal government. 

Let me remind you, that is not just a statistic – it is the difference between keeping room in the monthly budget and cutting back again.

The PCE index matters because it is the inflation measure the Fed watches most closely. CPI is usually the better-known household term, but PCE gives policymakers a broader view of consumer spending patterns. Either way, the practical problem is the same: the cost of maintaining a normal life keeps rising.

Despite these unwelcome inflation reports, there are reports that some economic indicators are strong. 

Take CEO pay, for example. Median pay for CEOs rose six percent in 2025. Personally, I do not begrudge anyone being rewarded for building a successful company (although I do feel a little jealous). My point is different: Wage gains at the top can make the overall economy look healthier than it feels around ordinary kitchen tables.

On the other hand, U.S. jobless claims for a recent week increased to 215,000 people, and the total number of Americans receiving jobless aid is at 1.79 million. While it sounds like a lot, the overall unemployment rate is just 4.3% – historically, an extremely low figure. Jobless claims are not flashing a crisis signal by themselves. That matters, because exaggerating the labor data would be a mistake. But they do show another pressure point: a growing number of households are dealing with higher prices at the same time the job market looks less forgiving than it did a few years ago.

That is the part I do not want readers to miss. Inflation hurts most when flexibility disappears.

At the same time, mortgage rates are rising, too, which makes it harder for families to buy homes. Since home ownership has always been considered the passport to a middle-class life, the combination of unaffordable home prices and expensive mortgages makes that dream unachievable for the majority of American families. And higher mortgage rates do not just affect new buyers – they can freeze families in place. A retiree who hoped to downsize may hesitate. A young family may delay buying. A homeowner who needs to move for work may think twice. That is how higher borrowing costs quietly reduce household flexibility.

Economists sometimes call this a “K-shaped” economy. One side of the economy rises: asset owners, high earners, executives and households with plenty of financial cushion. The other side slides lower: families whose income is mostly spent on groceries, utilities, insurance, housing and debt payments.

The danger is that both groups technically live in the same economy – but they experience it very differently.

So, how are people dealing with this situation?

For the wealthy, they’ll likely continue to work to increase their income and net worth.

For the average American, though, they’re taking a very different track which isn’t really a surprise. After all, what would you do when “after-tax, inflation-adjusted incomes fell for the third straight month?”

You’d do what a survey earlier this month showed: two-thirds of people surveyed said that they’re cutting expenses, holding off on major purchases, and cutting back on spending overall.

They’re economizing on clothes, shoes, hobbies, and toys. Grandparents are delaying trips. Retirees are postponing home repairs. Parents are trimming “extras” that used to feel normal – a weekend trip, new shoes before school starts, a birthday outing, the kind of modest family treat that used to fit inside the budget without a long discussion.

People are going into defensive mode. And who can blame them? Most people don’t receive CEO pay and aren’t major asset owners. They aren’t the people on the upward track in the K-shaped economy.

It can be enough to drive you a bit crazy, but despite what media talking heads and politicians may say, rosy economic numbers are only helping a portion of Americans. According to the Brookings Institute, almost half of all Americans are going backwards financially. They aren’t bringing in enough money to pay for just their necessities, never mind eating out occasionally or seeing a movie.

That is the part of the economy that rarely shows up in celebratory headlines. Families can be employed, responsible and still fall behind because the cost of ordinary life has outrun their margin for error.

One detail from that report deserves special attention: A cost-of-living increase of just $19.20 per week could push another three million households into a position where they cannot make ends meet. That's less than the cost of a modest lunch for two. For millions of families, it may also be the difference between staying afloat and sinking

Did I mention that many Americans are struggling right now? 

They are, and it’s a very real struggle.

The fallout from this

Now, I’m not going to pretend that I have a crystal ball, but I would be doing you a disservice if I didn’t mention a very real possible outcome of all of this.

None of this means a recession is guaranteed. That would be too strong. But these are the kinds of conditions that make an economy more fragile: persistent inflation, expensive housing, cautious consumers and a job market that may no longer feel as secure as it once did.

Recessions do not usually arrive because one number turns bad. They arrive when enough pressure points begin reinforcing one another.

Are we in a recession? No. Are we absolutely, definitely going into a recession? No, and I sincerely hope that we don’t.

But I wouldn’t be telling you the truth if I didn’t let you know that a recession sometime in the next few years is a real possibility if several of those factors don’t change. 

And if a recession happens, what would that be like? 

Historically, recessions are marked by broad declines in economic activity – weaker employment, softer income growth, lower business activity and more caution from lenders and consumers. For households already cutting back, that matters because a downturn can turn today’s budgeting strain into tomorrow’s financial emergency.

People are struggling, and have fewer options to try to get out of that situation. A recession just makes those challenges worse.

But the good news is that we aren’t currently in a recession, and that a recession isn’t necessarily a certainty.

What we can say with confidence is that the Fed does not aim for zero inflation. Its long-run goal is 2% inflation over time. That may sound small, but even 2% inflation compounds. Over a long retirement, a dollar that loses a little purchasing power each year can lose a lot.

Which leaves you with two choices: 

1. You can look for risky, high potential return investments. These can be smarter for younger people to do than those with families and reaching retirement age who have less of an acceptable margin of error in taking chances on higher risk investments. Or…
2. You can diversify to lower risk without notably affecting return. And to supercharge this option? You can incorporate diversifying into precious metals for their historical resistance to inflation.

If you’d like to find out more about diversifying into precious metals in a tax-advantage way, get our free 2026 Precious Metals Info Kit. Or if you already know that you’re ready to diversify into precious metals, simply give us a call at (877) 749-7738 to get started.

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

 

 

www.birchgold.com