This holiday season, America's poor households struggle under inflation while well-off consumers spend
November has been busier than expected at the Langham Hotel in Boston as luxury travelers book rooms in plush suites and hold meetings in gilded conference rooms. The $135-per-adult Thanksgiving brunch at its in-house restaurant sold out weeks ago.
Across town, in Dorchester, demand has been booming for a different kind of food service. Catholic Charities is seeing so many families at 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 the frigid Saturday morning before Thanksgiving, patrons waiting for free turkeys began to line the street at 4:30 a.m. — more than four hours before the pantry opened.
The contrast illustrates a divide that is rippling through America's topsy-turvy economy nearly three years into the pandemic. Many well-off consumers are still flush with savings and faring well financially, bolstering 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 low on cash buffers, struggling to keep up with rising prices and facing climbing borrowing costs if they use credit cards or loans to make ends meet.
The situation underlines a grim reality of the pandemic era. The Federal Reserve is raising interest rates to make borrowing more expensive and temper demand, hoping to cool the economy and bring the fastest inflation in decades back under control. Central bankers are trying to manage that without a recession that leaves families out of work. But the adjustment period is already a painful one for many Americans — evidence that even if the central bank can pull off a so-called soft landing, it won't feel
“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”
— Jerome Powell, chair of the Federal Reserve of the United States
benign to everyone.
“A lot of these households are moving toward the greater fragility that was the norm before the pandemic,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
Many working-class households fared well in 2020 and 2021. Although they lost jobs rapidly at the outset of the pandemic, hiring rebounded swiftly, wage growth has been strong, and repeated government relief checks helped families amass savings.
But after 18 months of rapid price inflation — some of which was driven by stimulus-fueled demand — the poor are depleting those cushions. American families were still sitting on about $1.7 trillion in excess savings — extra savings accumulated during the pandemic — by the middle of this year, based on Fed estimates, but about $1.35 trillion of it was held by the top half of earners and just $350 billion in the bottom half.
At the same time, prices climbed 7.7% in the year through October, far faster than the roughly 2% pace that was normal before the pandemic. As savings have run down and necessities such as car repair, food and housing become more expensive, many people in lower-income neighborhoods have begun turning to credit cards to sustain their spending. Balances for that group are now above 2019 levels, New York Fed research shows. Some are struggling to keep up at all.
“With the cost of food, the explosive cost of eggs, people are having to come to us more,” said Chambers of Catholic Charities, explaining that other rising prices, including rent, are intensifying the struggle.
The location planned to give out 1,000 turkeys and 600 gift cards for turkeys at its holiday distribution, along with bags of canned creamed corn, cranberry sauce and other Thanksgiving fare.
Tina Obadiaru, 42, was among those who lined up to get a turkey Saturday. A mother of seven, she works full time caring for residents at a group home, but it isn't enough to make ends meet for her and her family, especially after her Dorchester rent jumped last month from $2,000 to $2,500.
“It is going to be really difficult,” she said.
The disproportionate burden inflation places on the poor is one reason Fed officials are scrambling to quickly bring price increases back under control. Central bankers have lifted interest rates from near zero earlier this year to nearly 4%, and have signaled that there are more to come.
But the process of lowering inflation is also likely to hurt for lower-income people. Fed policies work partly by making it expensive to borrow to sustain consumption, which causes demand to decline and eventually forces sellers to charge less. Rate increases also slow down the labor market, cooling wage growth and possibly even costing jobs.
That means that the solid labor market that has buoyed the working class through this challenging time — one that has particularly pushed up wages in lower-paying jobs, including leisure and hospitality, and transportation — could soon crack. In fact, Fed officials are watching for a slowdown in spending and pay gains as a sign that their policies are working.
“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Fed Chair Jerome Powell said at a conference in August. “These are the unfortunate costs of reducing inflation.”
As the world waits to see whether the Fed can slow down the economy enough to control inflation without forcing the country into an outright recession, those coming to Catholic Charities in Boston illustrate why the stakes are so high. Although many have jobs, they have been buffeted by months of rapid price increases and now face an uncertain future.
“Before the pandemic, we thought in cases,” Chambers said, referencing how much food is needed to meet local need. “Now we think only in pallets.”