Excessive regulation is squeezing the middle class out of the financial system and straining consumer spending, says star Wall Street analyst Meredith Whitney.

Consumer spending has been growing but mainly driven by wealthier consumers, as the "debanked" middle class grows increasingly marginalized, Whitney says.

Retail sales rose 0.4 percent during the post-holiday season, although higher-end consumers are mainly driving that increase, which makes the economy look healthier than it really is.

"It’s somewhat of a false indicator looking at consumer spending and saying all consumers are doing so much better," Whitney tells CNBC.

"You haven’t had substantive wage growth and you see the contraction in available credit for mainstream America take a toll."

"The folks that are compromised are the middle class, that have been effectively debanked and cut out of the credit system," Whitney says, adding $2 trillion in credit lines have been cut out of the financial system since the crisis.

Blame excessive regulation for squeezing the middle class out of the financial system.

"You're going to see more and more people living outside the system. When it happens, it becomes so much more difficult to operate...The pendulum swings to too much regulation and it squeezes out the system."

Consumer spending accounts for 70 percent of total U.S. economic output.

Meanwhile, the gap between the rich and poor in the U.S. continues to widen.

Earnings inequality in the U.S. rose to a postwar high, according to the Federal Reserve Bank of Minneapolis.

"The bottom 20 percent of the U.S. population has never done so poorly, relative to the median, during the whole postwar period," economists Fabrizio Perri and Joe Steinberg write in a paper released Tuesday by the Minneapolis Fed, according to Bloomberg.

"Low-earning households have become, during the course of the Great Recession, more vulnerable due to large losses in wealth."