'Shark Tank' star Kevin O'Leary warns of a 'downsized America' as rising prices and loan payments force consumers to cut back

• Households are being hit hard by inflation and higher interest rates, Kevin O'Leary says.
• Consumers can afford less so they're having to settle for smaller, cheaper homes and cars, he says.
• The "Shark Tank" investor predicts the Fed will hike rates toward 6% to combat stubborn inflation.

Americans are suffering lifestyle erosion because surging prices and steeper borrowing costs mean their incomes don't go as far as they once did, Kevin O'Leary says.

"We're looking at a downsized America," the "Shark Tank" star recently told Fox News. O'Leary noted that mortgage rates have soared from below 5% to upwards of 8% within the last two years, meaning people have to settle for a home that's 20% to 25% smaller than what they could previously afford. 

The veteran investor — whose nickname is "Mr. Wonderful" — also flagged that interest rates on auto loans have jumped from 5% to 8% or even 9%, forcing drivers to downsize to smaller, cheaper vehicles. Moreover, climbing oil prices mean drivers could soon have to "pay a fortune in gasoline," O'Leary said.

"People are looking at the cost of energy, protein, car loans, mortgages," he said about the impact of inflation. "It hits you every day at the pump. It hits you every day at the grocery store. It's nasty."

The annualized pace of price increases hit a 40-year high of more than 9% last year, spurring the Federal Reserve to hike interest rates from virtually zero to over 5% in the space of 18 months. Higher rates encourage saving over spending and make it costlier to borrow money, which can help cool demand and curb price growth.

Inflation has slowed to below 4% in recent months, but that's still well above the central bank's target rate of 2%.

O'Leary warned that inflation doesn't appear to be slowing anymore, and suggested that could prompt the Fed to raise rates to about 6% by early next year.

Bernie Marcus, the billionaire cofounder of Home Depot, issued a similar warning about surging prices during another recent Fox News interview.

He said the retailer's customers are "getting killed," adding: "They can't afford to fill their cars with gas. They can't afford to put a good meal on the table for their families. They can't afford their rent. They can't afford their insurance."

"Every freaking thing that there is, is up," Marcus continued, underscoring that when inflation cools, prices still rise – just at a slower pace.