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It’s no secret that stubborn inflation and aggressive Federal Reserve interest rate hikes have weighed on Americans’ finances for over a year now, but new data from the central bank shows just how many consumers are feeling the pain.
Some 37% of Americans lack enough money to cover a $400 emergency expense, according to the Fed’s 2022 Economic Well-Being of U.S. Households survey released Monday, up from 32% in 2021. That means nearly one in four consumers would have to use credit, turn to family, sell assets, or get a loan in order to cover any major unexpected cost. And when asked about non-emergency expenses, 18% of Americans said the largest expense they could cover using only their savings was under $100.
“The 2022 survey found that self-reported financial well-being was among the lowest levels observed since 2016,” the central bank’s researchers wrote of the data, noting that “higher prices have negatively affected most households.”
While a record 35% of Americans said they were doing worse off financially than a year ago in the Fed’s latest household survey, there were also some bright spots due to the low unemployment rate. Despite consistent recession predictions from Wall Street, the U.S. unemployment remained at a 54-year low of 3.4% in April. And the Fed found that one-third of U.S. adults received either a raise or a promotion in 2022 amid the strong labor market.
The only problem is those raises weren’t enough for most Americans to keep up with inflation. Between April 2022 and April 2023, real average hourly wages fell 0.5%, according to the Bureau of Labor Statistics. And the Fed’s latest survey found that “more adults experienced spending increases than income increases” in 2022—44% of Americans spent more, while just 33% made more.
That mismatch in income and spending affected many consumers’ progress toward their retirement savings goals in 2022. Just 31% of non-retirees said their retirement savings plan was on track at the end of last year, a 9 percentage point drop from 2021, according to the Fed’s data.
The financial burden of high borrowing costs and rising prices is rearing its head in spending this year as well. Claire Tassin, a retail and e-commerce analyst at the decision intelligence company Morning Consult, told Fortune last week that while consumers’ overall spending has remained resilient in 2023, many are avoiding big-ticket discretionary purchases, which is evidence of “inflation’s persistent impact.”
“In an April survey, 85% of Americans said they’re concerned about inflation’s impact on their household finances,” she said, noting that amounts to a 6 percentage point increase since January. “That means shoppers continue to make tough trade offs and defer purchases in order to meet their financial obligations.”
Gregory Daco, chief economist at EY Parthenon, warned in a Monday note that persistent inflation and elevated interest rates are also cooling the labor market and creating a “cautious consumer.” Daco believes the economy could fall on hard times as “vulnerabilities” in Americans’ finances become increasingly evident in this environment (consumer spending accounts for 70% of U.S. GDP). There’s “turbulence ahead,” he wrote. “We continue to anticipate a modest recession.”
