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With as much as 60% of U.S. consumers living paycheck to paycheck, it’s not a surprise to see that the spending cutbacks have started. Even with a strong job market and wage gains, as well as Covid stimulus savings, pricing spikes in core spending categories including food, gas and shelter are leading more Americans to mind their pocketbooks closely.

A new survey from CNBC and Momentive finds rising concerns about inflation and the risk of recession, and Americans saying not only have started buying less but will be buying less across more categories if inflation persists. But these financial stress points are not limited to lower-income consumers. The survey finds American with incomes of at least $100,000 saying they’ve cut back on spending, or may soon do so, in numbers that are not far off the decisions being made by lower-income groups.

The high-income consumer demographic is key to the economy. While it represents only one-third of consumers, it is responsible for up to three-quarters of the spending. As Mark Zandi, chief economist at Moody’s notes, “If the high-income consumers are out buying, we won’t see a big impact on raw consumer activity.”

Lower-income households are the most at risk, and they are the ones most likely to be making unwelcome tradeoffs to make their money stretch as far as it did just a few months ago, according to the survey results. They are also clearly experiencing more financial anxiety, according to the survey, with 57% of Americans with income under $50,000 saying they are under more stress than a year ago, versus 45% of those with incomes of $100,000 or more. The 68% of high-income consumers who said they are worried higher prices will force them to rethink financial decisions is significantly lower than the 82% of Americans with income of $50,000 or less who told the survey this, but it is still a majority.

More than half of people with household incomes under $50,000 say they have already cut back on multiple expenses due to prices, and for those with income of at least $100,000, the cutback levels are already similar when it comes to dining out, taking vacations, and buying a car.

“People making six-figure incomes are almost as worried about inflation as people making half as much —and they are just as likely to be taking steps to mitigate its effect on their lives,” said Laura Wronski, senior manager of research science at Momentive. “Inflation is a problem that compounds over time, and even high-income individuals won’t be insulated from the second- and third-order effects of price increases,” she said.

Other recent consumer survey data paints a weakening picture.

The University of Michigan Survey of Consumers finds more consumers mentioning reduced living standards due to rising inflation than at any other time in the survey’s history except during the two worst recessions in the past 50 years: from March 1979 to April 1981 and from May to October 2008. Notably, the consumer confidence gap between low and high income levels always shrinks at cyclical troughs and is always widest at peak, and the gap is narrowing now, according to survey director Richard Curtin. 

In January, the percentage point gap between the lowest income and highest income group in the survey’s sentiment index was 13.2 points. That was erased in March, with the top income group sentiment actually dipping below the lowest income bracket in overall sentiment and future expectations. In January, the higher income group expectations, specifically, were 18 percentage points higher.

Right now, there is a unique set of issues that could be exacerbating this gap narrowing, Curtin said, including the potential for Russia’s invasion of Ukraine to do more damage to the global economy than forecast and the fact that the majority of the population has not experienced 10%+ inflation, or 15% mortgage rates, as past generations had.

“Even at lower rates they may display behaviors associated with more extreme economic conditions in the past,” Curtin said. “Precautionary motives play a big part in consumption trends for upper income groups,” he added.

“The American consumer is in a dark mood,” Zandi said of the CNBC survey data. More than two years since the pandemic hit, first with millions of lost jobs and high unemployment, and now high inflation, and “fractured politics also weighing heavily on the collective psyche.”

All income groups in the survey are equally likely to say the economy will enter a recession this year, at over 80%. But there is a key caveat: actual spending actions from the economy don’t yet indicate this prediction will come true.

Despite the downbeat feelings about their financial situations, and cutbacks, Zandi stressed that consumers are still spending strongly. There are now lots of jobs, unemployment is low, debt loads are light, asset prices are high, and there is a lot of excess saving. Even if people are cutting back, spending less on some items, the mood has not yet taken control of the spending motivation to a degree that amounts to more than a slowdown in economic growth. “I suspect the American consumer will continue spending, regardless of their mood, as long as the job market remains strong,” Zandi said.

The Conference Board’s latest monthly confidence index reading showed present confidence up (slightly) for the first time this year, but the expectations index lower, with consumers citing rising prices, including gas.

Lynn Franco, director of economic indicators and surveys at The Conference Board, said there is still a gap in its confidence data between lower income and higher income consumers and a lot of that is driven by the inflationary environment, and less impact the affluent will feel from factors including gas prices. She said the gap does always narrow in a pre-recession period — but its data is not indicating a recession as of now.

What its confidence survey is forecasting is a slowdown in growth over the next few quarters driven by higher prices, and more Americans spending less on discretionary items as more of their money goes to covering the basics. That will be most acutely felt by the lower-income consumers, but there is broad-based concern about prices rising significantly in the months ahead — 6 out of every 10 consumers surveyed by The Conference Board think the Russia-Ukraine war will cause prices to rise significantly.

“That is very broad-based and that, coupled with interest rates going up, may make people more hesitant to postpone big-ticket purchases likes housing and autos and washing machines,” Franco said. “We will see a bit of slowing in consumer spending over the next few quarters, but we don’t feel that will drive us into recession.”

The overall confidence level from Americans with income of $125,000 in its survey has come back down from mid-2021, but Franco described them as still “relatively confident despite all volatility we have seen. … The indications we are getting across income groups speaks more towards softening in consumer spending rather than a severe pullback,” she said.

The Conference Board data, similar to other outlooks, is underpinned by a key role for the labor market in supporting confidence and balancing the negative influence of inflation, with Americans who say jobs are “plentiful” at an all-time high. 

Members of the CNBC CFO Council have mentioned “a tale of two cities” among consumers, with higher income bracket consumers continuing to be strong while lower income consumers are beginning to chew through the stimulus. There will be a new equilibrium point, and inflation won’t grow as it has over the past year, but it will remain at a higher level, and the consumer spending has to be set against this dynamic that will play out through calendar year 2022, and is expected to be more sharply felt in the second half of the year.

Key factors that CFOs are watching include the decline in the consumer savings rate; how successful the Fed is in using its tools to slow the economy without pushing it into recession, including raising rates to cool consumption and investment; and greater supply chain stability.

The supply chain remains in flux with new Covid variants, as well as the Russian war against Ukraine hitting energy and food prices. But if supply chain pressures overall do ease, inventory will be replenished at a rate that could lead to more pushback from retailers on pricing, as consumers also begin to slow down consumption habits, trading down in certain categories of purchases or trading away from them.

The Conference Board’s most recent CEO survey showed that companies are passing along the costs of inflation relatively quickly to consumers, and that pattern is likely to continue in the months ahead, with wage gains a contributing factor. “What we are seeing and hearing from members is that these tight labor market conditions are going to continue for several months, so we will continue to see wage pressure,” Franco said.

As earnings come in, the market will be looking for signs of durable consumer strength amid higher prices. Earlier this week, Conagra’s results showed that it couldn’t make price increases flow through to its bottom line relative to input costs, but CEO Sean Connolly said on Thursday that “consumer demand has remained strong in the face of our pricing actions to date.”

Conagra is planning more price increases.

The view that higher interest rates help stamp out inflation is essentially an article of faith, based on long-held economic gospel of supply and demand.

But how does it really work? And will it work this time around, when bloated prices seem at least partially beyond the reach of conventional monetary policy?

It is this dilemma that has Wall Street confused and markets volatile.

In normal times, the Federal Reserve is seen as the cavalry coming into quell soaring prices. But this time, the central bank is going to need some help.

“Can the Fed bring down inflation on their own? I think the answer is ‘no,'” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “They certainly can help rein in the demand side by higher interest rates. But it’s not going to unload container ships, it’s not going to reopen production capacity in China, it’s not going to hire the long-haul truckers we need to get things across the country.”

Still, policymakers are going to try to slow down the economy and subdue inflation.

The approach is two-pronged: The central bank will raise benchmark short-term interest rates while also reducing the more than $8 trillion in bonds it has accumulated over the years to help keep money flowing through the economy.

Under the Fed blueprint, the transmission from those actions into lower inflation goes something like this:

The higher rates make money costlier and borrowing less appealing. That, in turn, slows demand to catch up with supply, which has lagged badly throughout the pandemic. Less demand means merchants will be under pressure to cut prices to lure people to buy their products.

Potential effects include lower wages, a halt or even a drop in soaring home prices and, yes, a decline in valuations for a stock market that has thus far held up fairly well in the face of soaring inflation and the fallout from the war in Ukraine.

“The Fed has been reasonably successful in convincing markets that they have their eye on the ball, and long-term inflation expectations have been held in check,” Baird said. “As we look forward, that will continue to be the primary focus. It’s something that we’re watching very closely, to make sure that investors don’t lose faith in [the central bank’s] ability to keep a lid on long-term inflation.”

Consumer inflation rose at a 7.9% annual pace in February and probably surged at an even faster pace in March. Gasoline prices jumped 38% during the 12-month period, while food rose 7.9% and shelter costs were up 4.7%, according to the Labor Department.

There’s also a psychological factor in the equation: Inflation is thought to be something of a self-fulfilling prophecy. When the public thinks the cost of living will be higher, they adjust their behavior accordingly. Businesses boost the prices they charge and workers demand better wages. That rinse-and-repeat cycle can potentially drive inflation even higher.

That’s why Fed officials not only have approved their first rate hike in more than three years, but they also have talked tough on inflation, in an effort to dampen future expectations.

In that vein, Fed Governor Lael Brainard — long a proponent of lower rates — delivered a speech Tuesday that stunned markets when she said policy needs to get a lot tighter.

It’s a combination of these approaches — tangible moves on policy rates, plus “forward guidance” on where things are headed — that the Fed hopes will bring down inflation.

“They do need to slow growth,” said Mark Zandi, chief economist at Moody’s Analytics. “If they take a little bit of the steam out of the equity market and credit spreads widen and underwriting standards get a little tighter and housing-price growth slows, all those things will contribute to a slowing in the growth in demand. That’s a key part of what they’re trying to do here, trying to get financial conditions to tighten up a bit so that demand growth slows and the economy will moderate.”

Financial conditions by historical standards are currently considered loose, though getting tighter.

Indeed, there are a lot of moving parts, and policymakers’ biggest fear is that in tamping down inflation they don’t bring the rest of the economy down at the same time.

“They need a little bit of luck here. If they get it I think they’ll be able to pull it off,” Zandi said. “If they do, inflation will moderate as supply-side problems abate and demand growth slows. If they’re unable to keep inflation expectations tethered, then no, we’re going into a stagflation scenario and they’re going to need to pull the economy into a recession.”

(Worth noting: Some at the Fed don’t believe expectations matter. This widely discussed white paper by one of the central bank’s own economists in 2021 expressed doubt about the impact, saying the belief rests on “extremely shaky foundations.”)

People around during the last serious bout of stagflation, in the late 1970s and early 1980s, remember that impact well. Faced with runaway prices, then-Fed Chair Paul Volcker spearheaded an effort to jack up the fed funds rate to nearly 20%, plunging the economy into a recession before taming the inflation beast.

Needless to say, Fed officials want to avoid a Volcker-like scenario. But after months of insisting that inflation was “transitory,” a late-to-the-party central bank is forced now to tighten quickly.

“Whether or not what they’ve got plotted out is enough, we will find out in time,” Paul McCulley, former chief economist at bond giant Pimco and now a senior fellow at Cornell, told CNBC in a Wednesday interview. “What they’re telling us is, if it’s not enough we will do more, which is implicitly recognizing that they will increase downside risks for the economy. But they are having their Volcker moment.”

To be sure, odds of a recession appear low for now, even with the momentary yield curve inversion that often portends downturns.

One of the most widely held beliefs is that employment, and specifically the demand for workers, is just too strong to generate a recession. There are about 5 million more job openings now than there is available labor, according to the Labor Department, reflecting one of the tightest jobs markets in history.

But that situation is contributing to surging wages, which were up 5.6% from a year ago in March. Goldman Sachs economists say the jobs gap is a situation the Fed must address or risk persistent inflation. The firm said the Fed may need to take gross domestic product growth down to the 1%-1.5% annual range to slow the jobs market, which implies an even higher policy rate than the markets are currency pricing — and less wiggle room for the economy to tip into at least a shallow downturn.

So it’s a delicate balance for the Fed as it tries to use its monetary arsenal to bring down prices.

Joseph LaVorgna, chief economist for the Americas at Natixis, is worried that a wobbly growth picture now could test the Fed’s resolve.

“Outside of recession, you’re not going to get inflation down,” said LaVorgna, who was chief economist at the National Economic Council under former President Donald Trump. “It’s very easy for the Fed to talk tough now. But if you go a few more hikes and all of a sudden the employment picture shows weakness, is the Fed really going to keep talking tough?”

LaVorgna is watching the steady growth of prices that are not subject to economic cycles and are rising just as quickly as cyclical products. They also may not be as subject to the pressure from interest rates and are rising for reasons not tied to loose policy.

“If you think about inflation, you have to slow demand,” he said. “Now we’ve got a supply component to it. They can’t do anything about supply, that’s why they may have to compress demand more than they normally would. That’s where you get recession.”