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Fed data sheds light on inflation impact

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By Charbel Kadib
  •  
3 minute read

Cost of living pressures and share market volatility have been blamed for record low levels of financial wellbeing among US households.

The Federal Reserve has published the results of its latest Survey of Household Economics and Decisionmaking (SHED) report — conducted in October 2022 — revealing financial wellbeing “declined markedly” to among the lowest levels since 2016.

According to the survey, 73 per cent of US adults said they were doing “at least okay financially”, down 5 percentage points from 2021.

Notably, 35 per cent of respondents said they were “worse off” financially — the lowest reading since the survey commenced in 2014.

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The 2022 result came against the backdrop of aggressive monetary policy tightening from the Fed, aimed at curbing elevated inflation.

This was reflected in reports of an increase in monthly spending, flagged by 40 per cent of respondents, up from 25 per cent in 2021.

Meanwhile, the share of US households reporting an increase in monthly income grew just 3 percentage points to 33 per cent.

Fewer households reported spending less than they earn, down from 67 per cent to 58 per cent over the same period.

The Fed data also suggests US households remain heavily dependent on credit, with 63 per cent stating they could cover a hypothetical $400 emergency expense exclusively using cash or its equivalent, down from 68 per cent in 2021.

Moreover, just 18 per cent of households said the largest expense they could cover using savings was under US$100 (AU$150), with an additional 14 per cent stating the largest expense they could cover was between US$100 and US$499 (AU$749).

Further, two-thirds of respondents revealed they stopped using a product or used less “because of inflation”, with 64 per cent switching to a cheaper product, and 51 per cent reducing their savings in response to higher prices.

Annualised inflation in the US peaked at 9.2 per cent in June but has since eased to 4.9 per cent.

Progress towards the Fed’s inflation target has raised hopes of a pause to the monetary policy tightening cycle, particularly off the back of mounting evidence of a looming credit crunch.

In its latest household survey, the Fed also linked the overall deterioration in financial wellbeing to equity market volatility, particularly among respondents with tertiary-level education — 31 per cent of respondents with a bachelor’s degree said they were worse-off financially, up from 13 per cent in 2021.

“This pattern may reflect the fact that those with bachelor’s degrees not only faced rising prices but, because they are more likely to have exposure to the stock market, may have also been more affected by stock market declines,” the Fed observed.

Equities markets recovered ground over the back end of 2022 and early part of 2023 but have since been impacted by banking tumult in the US, with the collapse of three US banks undermining investor confidence.

Markets are bracing for a recession later this year, expected to weigh on economic growth across developed markets.

The International Monetary Fund (IMF) recently revised its global economic growth projections, now anticipating world output of 2.8 per cent in 2023 before picking up to 3 per cent in 2024.

The fund’s January projections had forecast global output of 2.9 per cent in 2023 and 3.1 per cent in 2024.

The IMF is expecting US economic growth to slow to 1.6 per cent in 2023 and 1 per cent in 2024 — outpacing the Euro region in 2023 (0.8 per cent) but recording weaker growth in 2024 (1.4 per cent).

In Australia, the Reserve Bank has projected GDP growth of just 1.25 per cent in 2023, and 1.75 per cent in 2024.

Fed data sheds light on inflation impact

Cost of living pressures and share market volatility have been blamed for record low levels of financial wellbeing among US households.

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