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A holiday season divided by inflation and economic difficulties

November was busier than expected at Boston’s Langham Hotel, with luxury travelers booking rooms in plush suites and hosting meetings in gilded conference rooms. The $135 per adult Thanksgiving brunch at its on-site restaurant sold out weeks ago.

Across town, in Dorchester, demand has exploded for a different type of food service. Catholic Charities sees so many families in its free pantry that Beth Chambers, vice president of basic needs for Catholic Charities Boston, has had to close early on some days and tell customers to come back early in the morning. On the frosty Saturday morning before Thanksgiving, customers waiting for free turkeys began lining the street at 4:30 a.m., more than four hours before the pantry opened.

The contrast illustrates a fracture that is reverberating in the upside-down U.S. economy nearly three years into the pandemic. Many affluent consumers still have savings and are doing well financially, bolstering luxury brands and keeping some high-end retailers and tour operators optimistic about the holiday season. At the same time, America’s poor are cash-strapped, 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 under control. Central bankers are trying to manage this without a recession that leaves families out of work. But the adjustment period is already painful for many Americans — proof that even if the central bank can pull off a so-called “soft landing,” it won’t look benign for everyone.

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

Many working-class households have fared well in 2020 and 2021. Although they lost jobs quickly at the start of the pandemic, hiring rebounded quickly, wage growth was strong, and relief checks repeated government announcements have helped families save money.

But after 18 months of rapid price inflation — some of it driven by stimulus-fueled demand — the poor are exhausting those cushions. American families were still sitting on about $1.7 trillion in excess savings — extra savings accumulated during the pandemic — in the middle of this year, according to Fed estimates, but about $1.35 trillion was being held. by the top half of earners and only $350 billion. in the lower half.

At the same time, prices climbed 7.7% in the year to October, much faster than the pace of about 2% that was normal before the pandemic. As savings dwindle and necessities like car repairs, food and housing become significantly more expensive, many people in low-income neighborhoods have started to turn to credit cards to keep their spending down. . Balances for this group are now above 2019 levels, according to research from the New York Fed. Some find it hard to follow at all.

“With the cost of food, the skyrocketing cost of eggs, people have to come to us more,” Ms Chambers of Catholic Charities said, explaining that other price hikes, including rent, are intensifying the fight. The location planned to give away 1,000 turkeys and 600 turkey gift cards during its holiday giveaway, along with bags of canned creamed corn, cranberry sauce and other Thanksgiving dishes.

Tina Obadiaru, 42, was among those queuing for a turkey on Saturday. A mother of seven, she works full-time caring for residents of a group home, but it’s not enough to make ends meet for her and her family, especially after her rent in Dorchester jumped the month last at $2,500 versus $2,000.

“It’s going to be really difficult,” she said.

The disproportionate burden that inflation places on the poor is one of the reasons Fed officials are scrambling to bring price rises under control quickly. Central bankers raised interest rates from near zero at the start of this year to almost 4% and signaled that there were more to come.

But the process of reducing inflation is also likely to harm low-income people. The Fed’s policies work in part by making it expensive to borrow to prop up consumption, which leads to lower demand and ultimately forces sellers to charge less. Rate increases also slow the labor market, slowing wage growth and possibly even costing jobs.

This means that the strong labor market that has supported the working class during this difficult period – a market that has particularly boosted wages in the lowest-paying jobs, including leisure, hospitality and transport – could soon come to an end. 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 looser labor market conditions will reduce inflation, they will also hurt households and businesses,” said Jerome H. Powell, chairman of the Fed, 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 individuals and businesses begin to expect rapid price increases and act accordingly – asking for big increases, instituting frequent and large price increases – inflation could take root in the economy. It would then require a more punitive policy response to rein it in, one that could push unemployment even higher.

But the evidence mounting in the economy underscores that the slowdown the Fed has implemented, while necessary, is likely to feel different across income groups.

Overall, consumer spending has so far resisted Fed rate moves. Retail sales data moderated considerably at the start of the year, but has recently picked up. Personal consumer spending is not growing at a blistering pace, but it is still growing.

Yet beneath these aggregate numbers, an incipient change appears to be underway – one that highlights the growing divide in economic comfort between rich and poor. Credit card data from Bank of America suggests that high- and middle-income households have replaced low-income households to drive consumption growth in recent months. Poorer shoppers contributed a fifth of discretionary spending growth in October, up from around two-fifths a year earlier.

“This is likely because lower-income groups are the hardest hit by the price spike – they have also experienced the largest drop in bank savings,” the Bank of America Institute economists wrote in a note. of November 10.

Even if the poor feel the pressure of high prices and higher interest rates and retreat, economists have noted that the continued economic health of the wealthiest consumers could keep demand strong in areas where the wealthiest people tend to spend their money including services like 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 are no signs of an impending slowdown in spending.

In ‘The Fed’, the hotel bar named in a nod to the building’s heritage, bartenders are busy every weeknight whipping up cocktails with names like ‘Trust Fund Baby’ and ‘Apple Butter Me Up” (both $16). When customers return from shopping in nearby Newbury Street, the hotel’s general manager, Michele Grosso, said their arms were full of bags. He sees the fact that Thanksgiving brunch sold out so quickly as emblematic of continued demand.

“If people pulled out, we’d 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, rippling 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 “strong demand” for premium paid products.

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

However, companies that serve more low-income consumers report a sharp decline.

“This year, many consumers have relied on borrowing money or saving money to manage their weekly budgets,” Target chief executive Brian Cornell said in a Nov. 16 earnings call. “But for many consumers, those options are starting to run out. As a result, our customers are showing increasing price sensitivity, becoming more focused and responsive to promotions, and more hesitant to buy 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 competing for market share,” said Julia Coronado, founder of MacroPolicy Perspectives.

But others warn that even if the poorest are struggling, it may not be enough to bring down spending and prices significantly.

Many families paid off their credit card balances during the pandemic, and it’s now reversing, despite high credit card rates. Borrowing could help some households sustain consumption for a while, especially with strong job gains and the recent plunge in gasoline 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. Although many have jobs, they have been rocked by months of rapid price rises and now face an uncertain future.

“Before the pandemic, we thought about cases,” Ms Chambers said, referring to the amount of food needed to meet local needs. “Now we only think about pallets.”


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