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Rich splurging, others scrimping, report says

High prices erode spending power

(Matthew Lee/Globe Staff)
By Anne D’innocenzio
Associated Press / May 19, 2011

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NEW YORK — High gas prices are driving a wider wedge between the wealthy and everybody else.

The rich are back to prerecession splurging: Saks Fifth Avenue and Nordstrom customers are treating themselves to luxury items like $5,000 Hermes handbags and $700 Jimmy Choo shoes, and they’re paying full price.

At Target and Wal-Mart, shoppers are concentrating on groceries and skipping even little luxuries. BJ’s Wholesale Corp. said yesterday that its customers are buying more hamburger and chicken and less steak, and buying smaller packs to save money.

“The average shopper isn’t in the game, except for necessities,’’ said Faith Hope Consolo, chairman of retail leasing and marketing at Prudential Douglas Elliman. At the same time, among the rich, “Luxury products are selling like bread.’’

J.C. Penney, Wal-Mart, and home-improvement retailer Lowe’s Cos. all said they are noticing their customers are consolidating shopping trips to save money on gas as the average price hovers near $4 a gallon.

More than a half-dozen corporate earnings reports this week show that, for the affluent, rising prices are merely a nuisance. For others, they can mean scrimping to put food on the table.

The wealthy were the first to start spending again after the recession. Middle-class Americans’ spending started picking up late last year.

But the retail earnings results show that rising prices for gas and food — particularly meat, dairy, and produce — have started to erode spending power.

It could get worse later this year, when clothing prices are expected to rise 10 to 15 percent. Meat prices are expected to rise 6 to 7 percent this year, and dairy products as much as 5.5 percent, according to USDA estimates.

The bottom fifth of earners, with a median household income of $9,846, spend 35.6 percent of their income on food and 9.4 percent on gas, according to Citi Investment Research.

The top fifth, whose median household income is $157,631, spend only 6.8 percent on food and 1.9 percent on gas. So they feel price increases less.

“While the US economy is showing some signs of improvement, we expect the recovery will continue to be slow and uneven, particularly for more moderate-income households,’’ Gregg Steinhafel, Target’s chairman, said yesterday.

The divide is prompting retailers to alter their strategies: Luxury stores like Saks Fifth Avenue, which had added more items at lower prices after the financial meltdown in late 2008, are again rebalancing their assortments. Now, it’s back to the $300-plus dress shirts.

At the other end of the spectrum, Wal-Mart and others under more pressure to get their financially squeezed shoppers to spend, are offering more discounts and pushing smaller packages at the end of the month when shoppers have less money.