New York — 

The biggest economic buzzword of the last few years is “K-shaped.”

CEOs, economists and lawmakers all use the letter K to describe the divergence between the haves and have-nots in America’s economy, from the housing market to spending on gas.

The wealthiest people in America have split from the poorest. The war in Iran is making it worse, squeezing low-income households that spend the largest portion of their income on gas and necessities.

But it’s now becoming clear that the income distribution in America is not shaped like a K, and the letter is the wrong way to explain the economy.

A new way of explaining America’s economic puzzle is needed: the “premium economy” economy.

More Americans have left the cramped, no-frills service of life in basic economy and moved up to premium class. They can afford the nicer flights, better groceries and fancier experiences of this upgraded section, but can’t reach the high-touch, hot towel service of home ownership and retirement in the next class.

Despite a growing chunk of people entering the ranks of the upper middle class and even becoming millionaires, they feel like they’re falling behind. That’s because owning a home, the defining symbol of middle-class life in America, has drifted out of reach. Retiring like the Baby Boomers, whose wealth has grown faster than younger generations, also seems to be in jeopardy.

So people are instead trading up where they can — spending their rising wages on the smaller, attainable perks they can afford in premium class. This shift has punished companies competing entirely on price, such as Spirit Airlines and Dollar General, while lifting the likes of Walmart and United Airlines that consumers perceive as higher quality.

Consider: Last year, Delta and United accounted for more than 90% of the airline industry’s profits.

“People have been waiting to call the death of consumer, but the consumer is still spending,” said Simeon Siegel, a retail analyst at Guggenheim Partners. “It’s much easier to label everything as a K-shaped economy.”

The upper-middle class grew from 10% of families in 1979 to 31% in 2024.

This group’s share of income also doubled, according to recent research from the American Enterprise Institute. A family of three earning $133,000 to $400,000 per year was defined as upper-middle class.

Meanwhile, the proportion of families who were classified as poor and lower-middle class also fell over the past five decades.

“The whole distribution has moved up,” said Scott Winship, a senior fellow at the American Enterprise Institute and co-author of the study. “It undercuts the idea that there’s hollowing out of the middle class.”

But the American dream of buying a home has disappeared for many younger generations. Nearly 40% of Americans do not own their home, so they missed out on soaring home values after the pandemic. Home prices have since ballooned to five times the average median income, trapping people in place.

So the new members of the upper-middle class are redirecting their higher wages to spending on the products and services they can afford. Travel, concerts and other fun activities have replaced home ownership in the “premium economy” economy.

Retail sales have also climbed for three consecutive months, bolstered by a healthy labor market and higher tax refunds.

“The consumer is still spending and working,” Ameriprise Financial chief market strategist Anthony Saglimbene said in a note to clients last week. “If inflation pressures ease at some point, the ‘K-shape’ in the economy could begin to flatten.”

This summer’s travel season is expected to surpass the last two, according to a recent Bank of America survey. Only roughly 10% of survey respondents are considering canceling their trip over high gas prices.

This economically-mobile group is also upgrading airlines, stores and restaurants.

Spirit Airlines shut down its operations in part because many of its customers grew willing to pay $30 or $40 more for a little extra legroom, free snacks and better service at larger carriers like United and Delta.

Walmart has also peeled off lower-income customers from competitors like Dollar General.

The two retailers share customers and have thousands of stores located close to one other. But Walmart has upgraded in recent years — cleaning up stores, sharpening prices and adding speedy curbside pickup and home delivery. This strategy helped it grab market share from Dollar General.

Hilton expects its “premium economy” hotel brands such as Spark by Hilton to grow in the coming years.

The US economy will enter a “C-shaped” phase in the next few years, Hilton CEO Chris Nassetta recently predicted, where consumer spending is more evenly balanced across income levels.

Lower inflation and interest rates and AI investments will eventually help low and middle-income consumers gain spending power and flatten the K-shape, he said.

“You are going to see this convergence.”