Year-end inflation: poor suffer and rich spend in the US

November has been busier than expected at the Langham hotel in Boston. Well-heeled travelers book comfortable rooms and suites and discuss business in the property’s gilded meeting rooms. Reservations for Thanksgiving brunch at the hotel’s restaurant, priced at $135 per adult, sold out weeks before the holiday.

Across town in Dorchester, the demand for a different kind of food service is growing. Catholic Charities is welcoming so many families to its food center that Beth Chambers, Catholic Charities Boston’s vice president for basic needs, had to order the center to close a few days early and ask patrons to to return early the next morning. On the Saturday morning leading up to Thanksgiving Day, users who were waiting for the free turkey distribution began to line up at 4:30 am — more than four hours before the establishment opened its doors.

The contrast illustrates a divide that is becoming increasingly stark in the distorted US economy after nearly three years of the pandemic. Many well-heeled shoppers continue to have big savings and financial strength, which benefits luxury brands and sparks optimism among luxury retailers and travel companies about the holiday season. At the same time, America’s poor face low liquidity and struggle to adjust to rising prices and cope with rising finance costs if they resort to credit cards or loans to keep their bills up to date.

The US Federal Reserve is raising interest rates to make borrowing more expensive and control demand, in the hopes that this will cool the economy and allow the institution to resume business. control over the highest inflation that the country has encountered in recent decades. Central bankers are trying to manage the process without causing a recession that creates unemployment. But the adjustment period has already been painful for many Americans — proof that even if the central bank manages to deliver a “soft landing,” it won’t be comfortable for everyone.

“Many of these households are heading towards greater fragility, which was the norm before the pandemic,” said Matthew Luzzetti, Deutsche Bank’s chief economist for the US market.

Many working-class households fared well in 2020 and 2021. While jobs were lost quickly at the start of the pandemic, hiring recovered just as quickly; wage growth has been strong and government financial assistance has helped families build up savings.

But after 18 months of rapid price inflation – some of which was driven by the demand the stimulus measures helped to generate – the financial reserves of the poorest people are running out. American households still held about $1.7 trillion (£9 trillion) in additional savings — savings built up during the pandemic — as of mid-year, based on Fed estimates, but about $1.35 trillion (R$7.2 trillion) of that total was held by the 50% of Americans with the highest wages and only US$350 billion (R$1.8 trillion) by the 50% with the lowest wages.

At the same time, prices rose by 7.7% through October in 2022, far above the pace of around 2% that was normal before the pandemic. As household savings dried up and necessities such as car repairs, food and housing became more expensive, many people in low-income neighborhoods began to turn to credit cards to keep their bills up to date. Debt balances for that group now top 2019 levels, according to a New York Fed survey. There are many people who have not been able to balance their accounts.

“With the cost of food and the skyrocketing price of eggs, people need to turn to us more often,” said Chambers of Catholic Charities, explaining that rising other prices, including rents, are intensifying difficulties. The organization planned to distribute 1,000 turkeys and 600 turkey vouchers this holiday season, accompanied by canned creamed corn, cranberry sauce and other ingredients used in Thanksgiving recipes.

Tina Obadiaru, 42, was among the people who lined up to receive a turkey on Saturday. A mother of seven, she works full-time as a carer for the residents of a hospice, but her salary is not enough to cover her family’s needs, especially after the rent on her Dorchester home went up from $2,000 (R $10,700) to $2,500 (R$13,400) last month.

The burden that inflation places on the poor is one reason Fed officials are scrambling to quickly rein in price increases. Central bank officials raised interest rates from close to zero earlier this year to nearly 4%, and have signaled more hikes to come.

But the process of reducing inflation is likely to hurt low-income people as well. The Fed’s policies act, in part, by making the loans that support consumption more expensive, which causes demand to fall and ultimately forces sellers to charge less. Interest rate hikes also slow the job market, reducing wage growth and possibly even costing jobs.

That means the solid labor market that has helped shore up the working class through this challenging period — a market that has especially boosted wages in lower-paying jobs, which include the leisure, hospitality and transport sectors — could lose steam. coming soon. Fed officials are looking for signs of a drop in spending and a slowdown in rising wages as a sign that their policies are working.

“While higher interest rates, slower growth and less vibrant conditions in the job market should reduce inflation, it will also bring some pain to households and businesses,” Fed chairman Jerome Powell said at an August conference call. . “These are the regrettable costs of a reduction in inflation.”

Central bankers believe that a moderate dose of pain now is better than what would happen if inflation were allowed to run amok. If people and businesses start anticipating rapid price increases and acting on them — asking for big wage increases, and raising prices too much too often — inflation could take root in the economy. This would call for a more punitive monetary policy response, which could result in even higher unemployment.

But the evidence accumulated across the economy points to the fact that the slowdown that the Fed has been promoting, as necessary as it is, will have different effects on different income brackets.

Consumer spending has so far resisted the Fed’s rate hikes. Data on retail sales showed a considerable decline earlier in the year, but have recently returned to growth. Personal consumption expenditures are not expanding at a rapid pace, but they continue to grow.

However, beneath these aggregate numbers, a turning point seems to be looming, and it highlights the ever-widening divide between the rich and the poor in terms of economic comfort. Bank of America credit card data shows that upper- and middle-income households have replaced lower-income households as the main drivers of consumption growth in recent months. Poorer consumers contributed one-fifth of growth in discretionary spending in October, compared with about two-fifths a year earlier.

“This is likely due to the fact that low-income groups suffered the greatest negative effects from rising prices — and also recorded the greatest reduction in their bank savings,” economists at the Bank of America Institute wrote in a research note released in November 10th.

Even as the poor are feeling the pinch from higher prices and higher interest rates and cut their spending, economists noted that maintaining economic health among wealthier consumers could keep demand strong in segments where wealthier people tend to spend their money including services like travel and hotels.

Companies that serve a larger number of low-income consumers are reporting a sharp decline.

“This year, many consumers are taking out loans or spending their savings to meet their weekly budgets,” Brian Cornell, chief executive of Target, said in a November 16 conversation with analysts about his company’s results. “But for many consumers, those options are starting to run out. As a result, our shoppers are exhibiting increased price sensitivity, are more focused on and interested in sales, and are more hesitant about buying at full price.”

As the world waits to see if the Fed will be able to slow the US economy enough to control inflation, but without forcing the country into a full-fledged recession, the people who attend Catholic Charities in Boston serve as an example of how much the stakes are high. Although many of them have jobs, the months of rapid price increases have taken a toll on them, and the future looks uncertain now.

“Before the pandemic, we did our math in boxes,” Chambers said, referring to the amount of food needed to meet local needs. “Now we calculate in ‘pallets'”.

Translated by Paulo Migliacci