Rising prices have weakened consumers’ spending power, as inflation remains elevated and the Federal Reserve continues to tighten its monetary policies. Against the backdrop of recession risk and growing macroeconomic uncertainty, a higher number of Americans at all income levels are now living paycheck-to-paycheck.
In a report by PYMNTS in collaboration with LendingClub it was found that 64% of U.S. wage earners are currently living paycheck-to-paycheck. Even those that earn $100,000 or more per year are feeling the financial pinch as prices continue to climb and interest rates remain high.
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From the same report, roughly 9.3 million more American consumers are now finding it increasingly difficult to put money away to savings, while keeping up with the rising cost of living as compared to a year before.
In December 2022, the annual inflation reading ended at 6.5%, as measured by the consumer price index. This figure was in line with economists’ expectations, and lower than the 7.1% recorded a month before in November.
While it seems as if the Fed's aggressive monetary tightening has helped cool down inflation - for now at least - prices remain high across most categories, with consumers spending more money on goods and services, rather than services.
In line with market expectations earlier in February, the Federal Open Market Committee (FOMC) announced yet another interest rate hike by 0.25 percentage points, bringing its target range to 4.5% - 4.75%. This has been the highest recorded target range since October 2007.
The announcement on February 1, by the FOMC to boost rates marked the first for the year, with economists predicting more to come as the months unfold. Since early last year, the Fed has raised rates a robust eight times.
Lower-Income Earners Hit The Hardest
Low-income earners, those making less than $52,00 per year have had the hardest time adjusting to recent price increases, as the cost of food, fuel, rent, retail, and utilities have soared over the last few months, despite inflation coming down.
Close to 70% of consumers who already had a hard time making ends meet were seen changing their spending habits and shopping lists to keep up with higher prices. A further 59% had already started to reduce nonessential grocery purchases, and 11% had to switch to lower-quality grocery items.
For lowest income earners, those making less than $20,000 annually, the cost of living growth nearly tripled the annual wage growth. In a report published by the University of Pennsylvania’s Wharton School, lowest income earners experienced a $578 age increase, while the cost of living remained elevated at $1,837.
Those that earn between $20,000 and $39,999 annually broke even, with annual house income at $2,276 and changes in the cost of living at $2,218, respectively. Meanwhile, the biggest earners, those making more than $150,000 annually, saw their wages far outpace the rate of inflation and the rising cost of living.
This shift has shown that a growing number of consumers, especially those in lower-income households, and the middle class are seeing the value of their dollars shrink. While many initially didn’t feel the shock of red-hot inflation at the start of the year, the ripple effect is now slowly starting to sweep across millions of American households.
Continued Recession Risk Despite Low Unemployment
The unemployment rate fell from 3.5% to 3.4%, marking the lowest since 1969 according to the Labor Department after U.S. employers added more than 517,000 new jobs in January 2023, far exceeding the 185,000 job gains predicted by Bloomberg economists.
Throughout the last several months, job gains have been strong, despite continuing economic headwinds. Total employment gains for November and December were up by 71,000 after revision.
Growing employment figures have been a sigh of relief for the economy as mega-tech companies continue to lay off employees at stratospheric rates.
Amazon announced back in January 2023 that it will be laying off more than 18,000 employees in retail and recruiting teams. Google CEO Sundar Pichai wasn’t shy when he announced that the global tech company is slashing around 12,000 jobs, while Microsoft has also already cut around 10,000 employees from its operations.
Until now, iPhone maker Apple has remained one of the only tech giants that have yet to make any indication on whether it will be laying off employees in the coming months.
Despite the strange scenario playing out, economists remain concerned about the possibility of a recession. With consumers growing anxious as prices keep rising, more and more employees are demanding higher wages to keep up with inflationary conditions.
Higher wages and growing paychecks have made it harder for the Fed to counter rampant running inflation. Despite their efforts to push down red-hot inflation with the higher cost of borrowing, consumers remained reluctant to request bigger paychecks and more lucrative wages.
Consumers Are Prioritizing Bills Over Subscriptions
Millions of consumers have had to make hard decisions over the last couple of months, rather than prioritizing their bills and purchasing products over memberships or subscriptions.
Findings reveal that 71.5% of consumers would prioritize their utility bills over other subscriptions and memberships, the highest among those recorded in a recent survey. Second to this is insurance, with 69.2% of respondents citing that they would rather keep paying while canceling other less important memberships or subscriptions.
Year-over-year inflation growth for energy prices has seen consumers paying 7.3% more in December 2022 than what they did for the same time a year before. Health insurance costs climbed 7.9% for the same recorded period.
Services including cable television, digital media, retail subscriptions, memberships subscriptions, and streaming services are among the first to be cut from consumer budgets as prices continue to rise. Around 1 in 5 of surveyed consumers said that one or several of these services will be the first on the chopping block as they seek to prioritize other more important bills.
As the cost of living continues to spiral, and with no real estimate of where prices will end up, it's becoming more clear that consumers will be cutting from their expenses, and that bills will take up more priority, while memberships and subscriptions take a backseat. In the fourth quarter of 2022, credit card debt jumped by 18.5%, reaching a record $930.6 billion. Consumers are increasingly considering cash advance options as a way to keep up with rising costs.
Streaming services and subscriptions had the highest cancellation rate, with 55.2% of surveyed consumers saying they are more likely to cancel this service as a way to alleviate financial pressure and prioritize other payments.
To Finish Off
Across the board, prices have been reaching never-before-seen levels, and American consumers are now feeling the financial pinch as inflation becomes a silent killer to their disposable income and dives deeper into their savings.
Although higher-than-usual interest rates have helped to cool down rampant running inflation, prices for most goods and services remain elevated. The ongoing economic headwinds have caused a growing number of consumers to live paycheck-to-paycheck. Even higher-income earners are now struggling to break even with their earnings and expenses.
With slowing economic activity and sinking consumer sentiment, it’s beginning to look as if recession risks are only growing further. Yet, after several rate hikes, and further economic deterioration, many are starting to wonder whether the Feds have done more right than wrong to fix the eroding economic conditions.
