November was a busier-than-expected month at the Langham Hotel in Boston, as luxury travelers book rooms in lavish suites and host meetings in gilded conference rooms. $135 per adult Thanksgiving brunch in his own restaurant sold out weeks ago.
Across town, in Dorchester, demand is growing for a different kind of food service. 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 in the morning. On a frigid 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 chasm rippling through the U.S. economy nearly three years after the pandemic began. Many well-off consumers are still flush with savings and doing well and strengthening financially luxury brands and keeping some top 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 get by.
The situation underscores 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 bring the fastest inflation in decades under control. Central bankers are trying to manage without a recession leaving families out of work. But the adjustment period is already a painful one for many Americans — proof that even if the central bank manages a so-called “soft landing,” not everyone will find it favorable.
“Many of these households are moving toward greater fragility that was the norm before the pandemic,” said Matthew Luzzetti, Deutsche Bank’s chief U.S. economist.
Many working-class households did well in 2020 and 2021. Although jobs were lost quickly at the start of the pandemic, hiring has rebounded quickly, wage growth has been strong, and repeated government checks on family aid have helped build savings.
But after 18 months of rapid price inflation — some of which was fueled by demand-driven stimulus — the poor are depleting those cushions. American families were still sitting Excess savings of $1.7 trillion — additional savings accumulated during the pandemic — by the middle of this year, the Fed estimates, but about $1.35 trillion of that was held by the top half of earners and just $350 billion by the bottom half.
At the same time, prices rose by 7.7 percent from the year to October, much faster than the roughly 2 percent pace that was normal before the pandemic. As savings dried up and necessities like car repairs, food, and housing skyrocketed, many people in lower income neighborhoods have started turning to credit cards to keep up with their spending. That group’s balances are now above 2019 levels, New York Fed research shows. Some struggle to keep up at all.
“Because of food prices, the explosive price of eggs, people have to come to us more,” said Mrs. Chambers of Catholic Charities, explaining that further rising prices, including rent, will intensify the struggle. The site planned to give away 1,000 turkeys and 600 turkey gift cards along with bags of canned corn, cranberry sauce and other Thanksgiving goodies in the holiday distribution.
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 support her and her family, especially after her rent in Dorchester jumped to $2,500 from $2,000 last month.
“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 bring price increases back under control. Central bankers have raised interest rates from near zero to nearly 4 percent this year and have indicated that they more to come.
However, the process of reducing inflation is likely to hurt people with lower incomes as well. Fed policy works in part by making it more expensive to borrow to sustain consumption, which causes demand to fall and ultimately forces sellers to charge less. Raising rates also slows the labor market, cools wage growth and may even make jobs more expensive.
This means that a solid labor market that has strengthened the working class during this difficult period – a period that has especially pushed upward wages in lower paying jobs, including leisure and hospitality and transport – could soon burst. In fact, Fed officials are watching the slowdown in spending and wage growth as signs that their policy is working.
“While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” said Fed Chairman Jerome H. Powell. key Fed conference in August. “That’s the unfortunate cost of reducing inflation.”
Central bankers believe that the level of pain today is better than what would happen if inflation were allowed to continue unchecked. If people and businesses begin to expect rapid price increases and behave accordingly—demanding large increases, implementing frequent and large price increases—inflation could become entrenched in the economy. Then it would require a more punitive policy response to bring it to heel, one that could push unemployment even higher.
But evidence accumulating across the economy underscores that the slowdown the Fed has prepared, however necessary, is likely to vary across income groups.
Aggregate consumer spending has so far been resilient to Fed rate moves. Retail sales data have eased significantly at the beginning of the year, but have increased again recently. Expenditure on personal consumption they are not expanding at breakneck speed, but they are still growing.
Yet beneath these aggregate numbers, there appears to be a nascent shift underway—one that highlights the widening gap in economic comfort between the rich and the poor. Credit card data from Bank of America suggests that upper- and middle-income households have replaced lower-income households in the thrust of consumption growth in recent months. Poorer shoppers contributed one-fifth to discretionary spending growth in October, compared with about two-fifths a year earlier.
“This is likely because lower-income groups are most negatively affected by the price spike — they also saw the biggest draw on bank savings,” economists at the Bank of America Institute wrote in a Nov. 10 note.
Although the poor feel the squeeze of increased 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.
At the Langham, a newly renovated hotel in a century-old building that originally served as the Federal Reserve Bank of Boston, there’s no sign of 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 week 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 general manager Michele Grosso said they have armfuls of bags. He sees the fact that the Thanksgiving brunch sold out so quickly as a symbol of continued demand.
“If people pulled out, we’d still be promoting,” he said of the three-course family meal. “We have a waiting list instead.
The consumption gap playing out in Boston is also clear nationally and reflected in corporate earnings. American Express, for example, added customers to platinum and gold cards at a record clip in the United States last quarter as it reported “strong demand” for premium, fee-based products.
“As we sit here today, we don’t see any changes in the way our customers spend,” Stephen J. Squeri, the company’s chief executive, told investors on an earnings call last month.
However, companies that serve more low-income consumers are reporting a significant decline.
“Many consumers this year have relied on borrowing or dipping into their savings to manage their weekly budgets,” Brian Cornell, Target’s chief executive, said in a Nov. 16 earnings call. “But for many consumers, those options are starting to run out. As a result, our guests are becoming increasingly price sensitive, more focused on and responsive to promotions, and more hesitant to purchase at full price.”
The split makes it difficult to predict what will happen next with spending and inflation. Some economists believe that the return of price sensitivity among lower-income consumers will be enough to help moderate overall costs and set the stage for a significant 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 are struggling, it may not be enough to meaningfully reduce spending and prices.
Many families have paid off their credit card balances during the pandemic, and that’s it now reversingdespite high credit card rates. The loan could help some households maintain consumption for a while, especially in conjunction with strong employment gains and the recent drop in gas prices, said Neil Dutta, head of U.S. economics 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 an outright recession, those who come to Catholic Charities in Boston illustrate why the stakes are so high. While many have jobs, they have been hit by months of rapid price rises and now face an uncertain future.
“Before the pandemic, we were thinking about cases,” Ms. Chambers said, referring to how much food is needed to meet local needs. “Now we only think in pallets.”