It’s no secret that stubborn inflation and the Federal Reserve’s aggressive interest rate hikes have weighed on Americans’ finances for more than a year now, but new central bank data shows how much pain many consumers feel.
Some 37% of Americans are short on money to cover a $400 emergency expense, according to the Fed’s 2022 U.S. Household Economic Well-Being investigation released on Monday, up from 32% in 2021. That means almost one in four consumers would need to take credit, turn to family, sell assets or get a loan to cover any major unforeseen costs. And when asked about non-emergency expenses, 18% of Americans said the largest expense they could cover using only their savings was less than $100.
“The 2022 survey found self-reported financial well-being to be among the lowest levels seen since 2016,” the central bank researchers wrote of the data, noting that “rising prices negatively affected most households.
While a record 35% of Americans said their financial situation was worse than a year ago in the Fed’s latest household survey, there were also bright spots due to the low rate of unemployment. Despite Wall Street’s constant recession forecasts, unemployment in the United States remained at a 54-year low of 3.4% in April. And the Fed found that a third of American adults received a raise or promotion in 2022 in a buoyant job market.
The only problem is that these increases were not enough for most Americans to keep up with inflation. Between April 2022 and April 2023, the real average hourly wage fell by 0.5%, according to the Bureau of Labor Statistics. And the latest Fed survey found that “more adults experienced increases in spending than increases in income” in 2022: 44% of Americans spent more, while only 33% earned more.
This mismatch of income and expenses has affected many consumers’ progress toward their retirement savings goals in 2022. Only 31% of non-retirees said their retirement savings plan was on track at the end from last year, a decline of 9 percentage points from 2021, according to Fed data.
The financial burden of high borrowing costs and rising prices is also being felt in spending this year. Claire Tassin, retail and e-commerce analyst at business intelligence firm Morning Consult, said Fortune last week that while overall consumer spending has remained resilient in 2023, many are avoiding expensive discretionary purchases, which speaks to “the lingering impact of inflation.”
“In an April survey, 85% of Americans said they were concerned about the impact of inflation on their household finances,” she said, noting that this equates to an increase in 6 percentage points since January. “It means buyers continue to make tough trade-offs and put off purchases in order to meet their financial obligations.”
Gregory Daco, Chief Economist at EY Parthenon, warned in a Monday note that persistent inflation and high interest rates are also cooling the labor market and creating a “cautious consumer.” Daco thinks the economy could be in for a tough time as the “vulnerabilities” in US finances become increasingly evident in this environment (consumer spending accounts for 70% of US GDP). There is “turbulence ahead,” he wrote. “We continue to anticipate a modest recession.”