Kat Johnston didn’t expect the pandemic to make her less stressed about her financial life. After all, she lost her job at the library where she worked.
But, like many Americans, she found unexpected relief from her money worries: Months at home limited her spending, and she received unemployment insurance and two US government aid checks.
“When I got back to work, I probably had $2,200 in savings. I know it’s not a lot, but it’s more than I’ve had in a long time,” she said.
The amount, however, was no match for the inflation that has raged since then. “That savings are practically gone. Because things have gotten so expensive, life has been almost paycheck to paycheck.”
Johnston, 31, lives in a Dallas (Texas) area in a kitchenette, and was hoping to upgrade to a bedroom — his cat sometimes uses his bed as a litter box, so it would be nice to be able to close the door. However, the rent is increasing so much that she is considering moving in with someone else.
Gasoline is so expensive that Johnston is only filling a quarter of a tank at a time. Johnston would like to find a better-paying job but is unsure about leaving a secure role and embarking on a grueling search at a time when economists and investors are warning of an impending recession.
Millions of Americans feel similarly trapped as their savings are low and the cost of living is higher. Now the economy looks set to slow — perhaps sharply — in ways that could limit wage growth and cause job losses, even if prices remain high.
But rather than rushing to boost activity by giving Americans cash, as they did in March 2020, officials are planning a slowdown. Before, the problem was the pandemic; now it’s stubbornly high inflation, and the main way the government knows to solve this is to inflict some economic suffering.
As the first round of pandemic relief programs began to expire in 2020, economists warned of a looming precipice that threatened both Americans who still needed government help and the pandemic-shattered economy that was not yet ready to sustain itself. on its own.
They repeated those warnings when Congress allowed unemployment benefits to expire for millions of workers, and again in January when monthly payments for families with children came to an end.
The loss of these programs was painful for many families, but for the economy as a whole, the cliffs looked more like holes. Consumers continued to spend, in part because trillions of dollars in government aid allowed many Americans to accumulate at least a small financial reserve — as Johnston did — and in part because a record recovery in the job market gave workers an income boost that partially compensated for the loss of government aid.
Now, as savings dry up and consumers struggle under the weight of high prices and soaring interest rates, the initial cracks are starting to show — and are likely to widen from here.
Wage gains have been below inflation for months. Credit card balances, which plummeted at the start of the pandemic, are rising to a record high. Subprime borrowers — those with poor credit scores — are increasingly late on payments, on automobiles in particular, according to data from credit bureaus. Hunger indicators are rising, even with unemployment still low and the general economy still strong.
“It’s already a bleak picture,” said Elizabeth Ananat, an economist at Barnard College who has studied the effect of the pandemic on low-income families. “The situation for families is much worse than it was a few months ago.”
In 2020, and to a lesser extent in 2021, the needs of families and the needs of the wider economy were aligned: Stimulus checks and other forms of government aid helped unemployed workers and their families avoid evictions, while helping businesses to avoid bankruptcy, homeowners to avoid foreclosure, and cities and states to avoid a collapse in their tax revenues.
Today that alignment has been broken. Giving people money now can help them pay their bills, but it can also worsen inflation by increasing demand, as companies can no longer produce goods and hire enough workers.
Instead, the Federal Reserve is trying to cool the economy by raising interest rates, making it more expensive to borrow money to buy a home or expand a business. Weaker business activity will slow down hiring, leading to slower wage growth and likely more layoffs. It could also allow US goods and services — limited for more than a year by supply chain problems and labor shortages — to catch up with demand, putting a brake on rising prices.
Fed policymakers argue that such a strategy is necessary to put the economy on a more sustainable path. Even if conditions worsen, however, inflation will likely take some time to slow down, and Fed officials believe it will still be high later in the year.
Many progressives initially resisted calls for the Fed to raise rates, arguing that the strong labor market — and the rare bargaining power it gave workers — was worth a brief period of rapid price increases. This has started to change as inflation worsens. Some economists devoted to labor issues now say the Fed is right to try to contain it, but that the government must simultaneously offer support to families who need it most.
“Children’s hunger is not a necessary cost to be paid to reduce inflation,” said Ananat of Barnard.
Meanwhile, Republicans have blamed the Biden administration — and in particular the $1.9 trillion American Rescue Plan that Democrats passed early last year — for fueling inflation. Many economists, also Democrats, agree that spending has driven at least some of the inflation, making bailout policy even more complicated.
The economy remains strong for now, but the first signs of a downturn are emerging. Employment growth, while rapid, is slowing. Unemployment insurance claims, still low, grew. Evictions increased in some cities where bans expired, and retail sales fell in May.
“I think we’re starting to see signs that the good times are coming to an end for some people,” said Karen Dynan, a former chief economist at the Treasury Department who is now at Harvard University. “There will be widespread suffering.”
Translated by Luiz Roberto M. Gonçalves
