A holiday season torn by inflation and economic struggles

November has been busier than expected at the Langham Hotel in Boston, as luxury travelers book rooms in luxurious suites and hold meetings in gilded conference rooms. The $135 per adult Thanksgiving brunch at their in-house restaurant sold out weeks ago.

Across town, in Dorchester, the demand for a different kind of food service has grown. Catholic Charities is seeing so many families at its free pantry that Beth Chambers, vice president of basic needs for Catholic Charities Boston, has had to close early some days and tell customers to come back first thing in the morning. On the frigid Saturday morning before Thanksgiving, customers hoping for free turkeys began lining up on the street at 4:30 am, more than four hours before the pantry opened.

The contrast illustrates a divide that is spreading across America’s topsy-turvy economy nearly three years after the pandemic. Many wealthy consumers are still flush with savings and doing 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 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 underscores 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 putting families out of work. But the adjustment period is already painful for many Americans, evidence that even if the central bank can pull off a so-called “soft landing,” it won’t feel benign to everyone.

“Many of these households are moving into greater fragility than was the norm before the pandemic,” said Matthew Luzzetti, chief US economist at Deutsche Bank.

Many working-class households did well in 2020 and 2021. Although they lost their jobs quickly at the start of the pandemic, hiring has picked up quickly, wage growth has been strong, and repeat government relief checks helped families to accumulate savings.

But after 18 months of rapid price inflation, some of which was fueled by stimulus-fueled demand, those cushions are being used up by the poor. American families still had about $1.7 trillion in excess savings (additional savings accumulated during the pandemic) as of the middle of this year, according to Fed estimates, but about $1.35 trillion was held by the top half of earners. and only $350 billion in the bottom half.

At the same time, prices rose 7.7 percent in the year to October, much faster than the normal pace of about 2 percent before the pandemic. As savings have been depleted and necessities like car repairs, food, and housing become more expensive, many people in low-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.

“With the cost of food, the exploding cost of eggs, people have to come to us more,” said Ms Chambers of Catholic Charities, explaining that other rising prices, including rent, are intensifying the fight. The venue planned to give out 1,000 turkeys, and 600 turkey gift cards, in its holiday distribution, along with bags of canned creamed corn, cranberry sauce and other Thanksgiving fare.

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Tina Obadiaru, 42, was among those who lined up to buy a turkey on Saturday. A mother of seven, she 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 went up from $2,000 to $2,500 last month. .

“It’s going to be very difficult,” he said.

The disproportionate burden that inflation places on the poor is one reason Fed officials strive to quickly rein in price increases. Central bankers raised interest rates from near zero earlier this year to almost 4 percent and have signaled more to come.

But the process of reducing inflation is likely to hurt low-income people as well. The Fed’s policies work in part by making borrowing more expensive to support consumption, which slows demand and eventually forces sellers to charge less. Fee increases also slow the job market, chilling wage growth and possibly even costing jobs.

That means the strong job market that has propelled the working class through this difficult time, which has driven up wages particularly in the lowest-paying jobs including leisure and hospitality and transportation, could soon crack. In fact, Fed officials are watching for a slowdown in spending and wage gains as a sign that their policies are 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 Jerome H. Powell, Fed Chairman, in a statement. at a key Fed conference in August. “These are the unfortunate costs of reducing inflation.”

Central bankers believe that a measure of pain today is better than what would happen if inflation were allowed to continue unchecked. If people and businesses start expecting rapid price increases and act on them (asking for big increases, instituting large and frequent price increases), inflation could take root in the economy. A more punitive policy response would then be needed to check it, one that could further increase unemployment.

But accumulating evidence across the economy underscores that the slowdown the Fed has been engineering, necessary as it may be, is likely to feel differently across different income groups.

Overall consumer spending has so far been resilient to Fed rate moves. Retail sales data moderated notably at the start of the year but has recently recovered. Personal consumption spending is not expanding at a breakneck pace, but it continues to grow.

Beneath those aggregate numbers, however, an incipient shift appears to be occurring, one that highlights the widening gap in economic comfort between rich and poor. Bank of America credit card data suggests upper- and middle-income households have replaced lower-income households to fuel consumption growth in recent months. The poorest shoppers contributed a fifth of the growth in discretionary spending in October, compared with two-fifths a year earlier.

“This is likely because low-income groups are the most negatively affected by rising prices; they have 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 from higher prices and higher interest rates and pull back, the 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 like travel and hotels.

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At the Langham, a recently renovated hotel in a century-old building that originally served as the Federal Reserve Bank of Boston, there’s little to suggest an imminent slowdown in spending.

At “The Fed,” the hotel bar named in a nod to the building’s heritage, bartenders are busy every night of the week serving cocktails with names like “Trust Fund Baby” and “Apple Butter Me Up” (both $16 ). When guests return from shopping on nearby Newbury Street, hotel managing director Michele Grosso said, her arms are full of bags. He sees the fact that Thanksgiving brunch sold out so quickly as emblematic of continued demand.

“If people pulled out, we would still be promoting,” he said of the three-course family meal. “Instead, we have a waiting list.”

The consumer divide playing out in Boston is also clear nationally, echoed through corporate earnings calls. American Express added customers for platinum and gold cards at a record pace in the United States last quarter, for example, as it reported “great demand” for fee-based premium products.

“As we sit here today, we see no change in our customers’ spending behaviors,” Stephen J. Squeri, the company’s chief executive, told investors during an earnings call last month.

However, companies that serve more low-income consumers are reporting a marked setback.

“This year, many consumers have relied on borrowing or dipping into 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 beginning to dry up. As a result, our guests are showing increasing price sensitivity, becoming more focused and receptive to promotions, and more reluctant to purchase at full price.”

The split makes it hard to guess what will happen next with spending and inflation. Some economists believe that the return of price sensitivity among low-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 to compete 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 significantly reduce spending and prices.

Many families paid off their credit card balances during the pandemic and that is now reversing, despite high credit card rates. The loan could help some households maintain their consumption for a while, especially along with strong job gains and the recent drop in gasoline prices, said Neil Dutta, head of US 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 full-blown recession, those who come 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 in cases,” Ms Chambers said, referring to the amount of food needed to meet local needs. “Now we think only in pallets.”

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