November was a busier-than-expected month at the Langham Hotel in Boston, with luxury travelers booking rooms in lavish suites and holding meetings in gilded conference rooms. The $135-per-adult Thanksgiving breakfast at his house restaurant sold out weeks ago.
Across town, in Dorchester, demand for a different kind of catering service was booming. Catholic Charities sees so many families in its free pantry that Beth Chambers, vice president of basic needs at Catholic Charities Boston, has had to close early some days and tell patrons to come back first thing in the morning. On a cold Saturday morning before Thanksgiving, patrons waiting for free turkeys began lining the street at 4:30 a.m. — more than four hours before the pantry opened.
The contrast illustrates the divide that ripples through the U.S. economy nearly three years after the pandemic. Many affluent consumers are still excited about savings and doing well financially, boosting luxury brands and keeping some high-end retailers and travel companies optimistic about the holiday season. At the same time, America’s poor are running out of cash reserves, struggling to keep up with rising prices and facing rising borrowing costs if they use credit cards or loans to make ends meet.
The situation highlights the grim reality of the pandemic era. The Federal Reserve is raising interest rates to make borrowing more expensive and dampen demand, hoping to cool the economy and rein in the fastest inflation in decades. Central bankers are trying to manage this without a recession that will put families out of work. But the adjustment period is already painful for many Americans — proof that even if the central bank were to pull off a so-called “soft landing,” it wouldn’t be good for everyone.
“Many of these households are moving toward greater fragility that was the norm before the pandemic,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
Many working-class households did well in 2020 and 2021. Although job losses were rapid at the start of the pandemic, employment has picked up quickly, wage growth has been strong and repeated government handouts have helped families build up savings.
But after 18 months of rapid price inflation — some of which was fueled by stimulus-driven demand — the poor are depleting those cushions. American families still had about $1.7 trillion in excess savings — extra savings built up during the pandemic — as of the middle of this year, according to Fed estimates, but about $1.35 trillion of that was held by the top half of earners and only $350 billion in lower half.
At the same time, prices rose 7.7 percent in the year to October, much faster than the roughly 2 percent pace that was common before the pandemic. As savings dwindled and essentials like car repairs, food and housing became more expensive, many people in lower-income neighborhoods turned to credit cards to keep their spending going. Balance sheets for this group are now above 2019 levels, the New York Fed survey shows. Some struggle to follow them at all.
“Because of the cost of food, the explosive cost of eggs, people have to come to us more often,” said Ms. Chambers of Catholic Charities, explaining that other rising prices, including rent, are adding to the struggle. The location planned to give away 1,000 turkeys and 600 turkey gift cards at the holiday distribution, along with bags of canned corn, cranberry sauce and other Thanksgiving treats.
Tina Obadiaru, 42, was among those who lined up to get a turkey on Saturday. The mother of seven works full-time caring for residents in a group home, but it’s not enough to make ends meet for her and her family, especially after her rent in Dorchester jumped to $2,500 from $2,000 last month.
Frequently asked questions about inflation
What is inflation? Inflation is the loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in the prices of everyday goods and services such as food, furniture, clothing, transport and toys.
“It’s going to be really hard,” she said.
The disproportionate burden inflation places on the poor is one reason Fed officials are scrambling to quickly rein in price increases. Central bankers have raised interest rates from near zero earlier this year to nearly 4 percent and signaled more is on the way.
But the process of reducing inflation is likely to hurt people on lower incomes as well. The Fed’s policies work in part by making borrowing to maintain consumption expensive, which causes demand to fall and eventually forces sellers to charge less. Rising interest rates also slow the labor market, dampen wage growth and may even cost jobs.
This means that the robust labor market that has supported the working class during this challenging time – one that has particularly boosted wages in lower-paid jobs, including leisure and hospitality and transport – could soon burst. In fact, Fed officials are seeing a slowdown in spending and wage gains as a sign that their policy is working.
“While higher interest rates, slower growth and softer labor market conditions will lower inflation, they will also bring some pain to households and businesses,” Fed Chairman Jerome H. Powell said at a key Fed conference in August. “That’s the unfortunate cost of reducing inflation.”
Central bankers believe that the extent of the pain today is better than what would happen if inflation were allowed to continue unchecked. If people and businesses come to expect rapid price increases and act accordingly—demanding large increases, introducing frequent and large price increases—inflation can become entrenched in the economy. Then a more punitive policy response would be needed to destroy it, one that could further increase unemployment.
But the accumulating evidence in the economy points to the fact that the slowdown the Fed is preparing, however necessary, is likely to vary across income groups.
Consumer spending in general has so far been resilient to changes in Fed interest rates. Retail sales data fell markedly at the start of the year, but have rebounded recently. Personal consumption expenditure is not expanding at a dizzying pace, but continues to grow.
But beneath these aggregate numbers, there appears to be an emerging shift—one that highlights the widening gap in economic comfort between the rich and the poor. Bank of America credit card data show that upper- and middle-income households have replaced lower-income households in driving consumption growth in recent months. Poorer shoppers accounted for one-fifth of the growth in discretionary spending in October, compared to around two-fifths a year earlier.
“This is likely because lower-income groups have been most adversely affected by rising prices — they’ve also seen the largest reduction in bank savings,” Bank of America Institute economists wrote in a Nov. 10 note.
Even if the poor feel the pressure of higher prices and higher interest rates and pull back, economists noted that continued economic health among wealthier consumers could keep demand strong in areas where wealthier people tend to spend their money, including services such as travel and hotels.
Understand inflation and how it affects you
At the Langham, a newly renovated hotel in a century-old building that originally served as Boston’s Federal Reserve Bank, there is little to indicate an impending slowdown in spending.
At “The Fed,” the hotel’s bar, named in a nod to the building’s heritage, bartenders are busy every weeknight making cocktails with names like the “Trust Fund Baby” and the “Apple Butter Me Up” (both $16). When guests return from shopping on nearby Newbury Street, hotel director Michele Grosso said, their hands are full of bags. He sees the fact that the Thanksgiving breakfast sold out so quickly as a symbol of continued demand.
“If people were pulling back, we’d still be promoting,” he said of the three-course family meal. “Instead, we have a waiting list.”
The spending gap evident in Boston is also evident nationally and echoed in corporate earnings reports. American Express, for example, saw a record increase in buyers for platinum and gold cards in the US last quarter, as it reported “strong demand” for premium prepaid products.
“As we sit here today, we don’t see any change in the spending behavior of our customers,” Stephen J. Squeri, the company’s chief executive, told investors during an earnings call last month.
Companies that serve more low-income consumers, however, are reporting a marked retreat.
“Many consumers have relied on borrowing or saving to manage their weekly budgets this year,” Target CEO Brian Cornell said in a Nov. 16 earnings call. “But for many consumers, those options are starting to disappear. As a result, our guests are becoming more price-sensitive, more focused on and responsive to promotions, and more hesitant to buy at full price.”
The distribution makes it difficult to predict what will happen to spending and inflation. Some economists believe that a return to price sensitivity among lower-income consumers will be enough to help moderate overall costs, paving the way for a noticeable slowdown in 2023.
“You get more promotional activity and companies start competing for market share,” said Julia Coronado, founder of MacroPolicy Perspectives.
But others warn that even if the very poor struggle, it may not be enough to significantly reduce consumption and prices.
Many families paid off their credit cards during the pandemic, and that is now changing, despite the high interest rates on credit cards. Borrowing could help some households sustain their spending for a while, especially in conjunction with strong employment growth and recently lower gas prices, said Neil Dutta, head of the U.S. economy at Renaissance Macro.
As the world waits to see if the Fed can slow the economy enough to control inflation without forcing the country into a full-blown recession, those coming to Catholic Charities in Boston illustrate why the stakes are so high. Although many have jobs, they have been hit by months of rapidly rising prices and now face an uncertain future.
“Before the pandemic, we were thinking about cases,” Chambers said, noting how much food is needed to meet local needs. “Now we only think in pallets.”