Americans’ financial health hit by higher inflation

Washington: Americans reported that their financial health had deteriorated sharply in 2022 in the face of elevated inflation, new data from the Federal Reserve on Monday showed.

According to a survey published by the US central bank, the share of US adults reporting that they were “doing at least OK financially” fell to 73 percent in 2022, down 5 percentage points from the previous year and one of the lowest readings since 2016.

Nearly a third reported they were either “just getting by” or “finding it difficult to get by”. The survey, which recorded the responses of more than 11,000 people in October, found that 35 percent of Americans said they were now worse off financially compared with a year earlier — the highest level since the question was first asked in 2014. Fed officials said unrelenting price pressures were primarily to blame, causing consumers to either stop buying certain items or switch to cheaper alternatives, and forcing them to dip into their savings.

The decline in sentiment has come as the Fed has embarked on its fastest monetary tightening campaign in decades to fight stubbornly high inflation. Over the course of 2022, the central bank raised its benchmark policy rate from near-zero to nearly 4.5 percent, repeatedly relying on jumbo 0.75 percentage point increases.

Following additional rate rises in 2023, including another quarter-point increase last month, officials are now debating whether to forgo further tightening at the next policy meeting in mid-June. A large cohort of policymakers worry that there has been only limited progress so far in getting inflation down, despite signs price pressures have peaked. Employers are still hiring and consumers are still spending, albeit more conservatively than last year, fuelling concern among policymakers that the economy still retains far too much momentum.

Complicating the economic outlook is uncertainty over the extent of the ongoing credit crunch, as lenders have pulled back in the wake of multiple bank failures since March. Jay Powell, the Fed chair, cited this on Friday as he hinted he might prefer to skip another rate rise at the June meeting.

Speaking on Monday, Mary Daly, president of the San Francisco Fed, said the recent credit tightening was equal to roughly one or two rate increases, although she said she would be watching the data closely to determine if that estimate still holds.

Daly did not state a preference for what to do about rates in June, but emphasised that balancing the risks between over-tightening and under-tightening is becoming “more and more challenging as the risks get more and more balanced”.

The Fed’s survey on Monday indicated that fewer Americans reported being able to cover an unexpected $400 expense using cash, savings, or a credit card that could be immediately paid off, with only 63 percent answering in the affirmative compared with 68 percent the year before. Just over 10 percent said they would not be able to cover the expense “by any means”.

Moreover, 18 percent said the largest expense they could cover with savings was under $100. Another 14 percent said their limit was $499.

Daniel Pinto, president of JPMorgan Chase, warned on Monday that the US economy is likely to tip into a recession as the Fed seeks to tackle soaring prices, which he said are “terrible for society”.