Inflation Expected to Remain High Even as Economy Slows and Layoffs Rise

Kat Johnston didn’t expect the pandemic to make her less stressed about her finances. After all, she temporarily lost her job at the library where she worked full time. But, like many Americans, she found an unexpected reprieve from money worries: Months at home limited her spending, and she received expanded unemployment insurance and two one-time checks from the government.

“When I first came back to work, I had probably $2,200 in savings — which I know is not much, but it’s more than I’d had in a while,” she said. But it was no match for the inflation that has come since. “That savings is pretty much gone now. As things have gotten so expensive, it’s been almost a paycheck-to-paycheck life.”

Ms. Johnston, 31, lives in the Dallas area in a studio apartment and had hoped to upgrade to a one-bedroom — her cat will occasionally use her bed as a litter box, so being able to shut the door would be good. Yet rent is increasing enough that she is considering moving in with a roommate instead.

Gas is so expensive that she is buying just a quarter of a tank at a time. Her $65,000 in student loans from undergraduate and graduate school were in forbearance before the pandemic because she was struggling to afford them on her roughly $40,000 annual income. She has been able to continue not paying them because of a government moratorium, but she knows that may not last forever.

She’d like to find a better-paying job, but she’s unsure about leaving a secure position — and embarking on a draining job search — at a moment when economists and investors warn of an impending recession. “It does feel like whatever I was thinking I was going to do is on hold,” she said.

Millions of Americans are feeling similarly stuck as their savings run low and their cost of living runs high. Now, the economy appears poised to slow — potentially sharply — in ways that could limit wage growth and cause job losses even as prices remain elevated. But instead of rushing to the economy’s aid by giving Americans money, as they did in March 2020, policymakers are engineering this slowdown. Then, the problem was a global pandemic; now, it’s stubbornly high inflation, and the main way the government knows to solve that is by inflicting some economic pain.

In other words, the long-predicted “cliff” may finally have arrived.

When the first round of pandemic aid programs began to expire in the summer of 2020, economists warned of a looming cliff facing both Americans who still needed government help and the pandemic-addled economy that was not yet ready to stand on its own. They repeated those warnings last fall, when Congress allowed unemployment benefits to expire for millions of workers, and again in January, when monthly payments for families with children came to an end.

The loss of those programs and others, including enhanced nutrition benefits, was painful for many families. But for the economy as a whole, the cliffs turned out to be more like potholes. Consumers kept on spending, in part because trillions in government aid had allowed many Americans to build up at least a small financial buffer — as Ms. Johnston did — and in part because a record-setting recovery in the job market gave workers an income boost that helped offset the loss in government aid.

Now, as savings run dry and consumers struggle under the weight of higher prices and rising interest rates, early cracks are beginning to show — and are likely to widen from here.

Pay gains have been falling behind inflation for months. Credit card balances, which fell early in the pandemic, are rising toward a record high. Subprime borrowers — those with weak credit scores — are increasingly falling behind on payments on car loans in particular, credit bureau data show. Measures of hunger are rising, even with unemployment still low and the overall economy still strong.

“It’s a grim picture already,” said Elizabeth Ananat, an economist at Barnard College who has studied the pandemic’s impact on low-income families. “Families are doing much worse than they were a few months ago.”

Matrice Moore-Carr, a registrar at a public hospital in Nashville, Tenn., kept her job during the pandemic, and even managed to get a bit ahead, thanks to stimulus checks that helped her pay off her electric bill and stop worrying, at least for a little while, about whether she could afford gas for her car.

When prices began to rise last year, Ms. Moore-Carr took on overtime shifts in the emergency room to make ends meet. When that wasn’t enough, she took a part-time job as a hotel receptionist. Now she is working seven days a week, often multiple jobs in one day, and still struggling to pay her bills.

“That’s what’s been helping me keep the gas in the car and food on the table and the electricity going,” she said. “I’ve been making it work. I’m tired, I’ll tell you that. I’m so sleepy.”

Ms. Moore-Carr, 52, owns her home, which she said is the only thing that allows her to keep living in Nashville, where both rents and home prices have soared in the pandemic. But the price of everything else has gone up — she joked about buying a horse to save on gas. On Tuesday, she stopped by the bank and turned in $47 in pennies.

What she said she really worries about is the prospect of losing her overtime hours.

“I don’t know what I’m going to do if anything gets any worse than it is now,” she said. “Am I going to have to cut my meals back? Am I going to have to eat once a day as opposed to three? I don’t know. It’s just tough.”

Low-income households, at least on average, emerged from the first two years of the pandemic in remarkably strong financial shape. Trillions of dollars in government aid ensured that poverty fell in 2020, despite the loss of tens of millions of jobs. New rounds of assistance in 2021, including monthly payments through an expanded Child Tax Credit, led to a sharp drop in measures of childhood poverty and hunger.

Those programs came from a very different economic moment, however. In 2020, and to a lesser degree in 2021, the needs of individual households and the needs of the broader economy were aligned: Stimulus checks and other forms of government aid helped jobless workers and their families avoid eviction, while at the same time helping businesses avoid bankruptcy, landlords avoid foreclosure, and cities and states avoid a collapse in their tax revenue.

Today, that alignment has broken down. Giving people money now might help them pay their bills, but it could also make inflation worse by adding to demand as businesses are already failing to produce enough goods and hire enough workers.

The Federal Reserve is instead trying to cool off the economy by raising interest rates, making it more expensive to borrow money to buy a house or expand a company. Weaker business activity will slow hiring, leading to slower wage growth and, most likely, more layoffs. It could also allow America’s goods and services — limited for more than a year by supply chain snarls and labor shortages — to catch up to demand, putting a damper on rising prices.

Fed policymakers argue that this strategy is necessary to put the economy on a more sustainable path. But even as conditions take a turn for the worse, inflation will probably take a while to slow, and Fed officials themselves think it will still be elevated at the end of the year.

“The transition is going to be very difficult,” said Seth Carpenter, global chief economist at Morgan Stanley and a former Fed economist. “At least historically, it takes a really long time for inflation to come down, even after the economy slows.”

Even if the Fed can avoid causing a recession, a weakening labor market will bring hardship for many. Job losses can be devastating, often setting off a downward spiral of eviction and debt. Those who keep their jobs are likely to get fewer hours of work and to lose bargaining power.

“Low-income workers, workers with low levels of education, Black and brown workers are the first to lose their jobs and the last to get them back,” said Diane Whitmore Schanzenbach, a Northwestern University economist who studies anti-poverty programs.

Fed officials have warned that the alternative — allowing inflation to remain high, and possibly letting it spring further out of control — would be even worse.

“You really cannot have the kind of labor market we want without price stability,” Jerome H. Powell, the Fed chair, said at a news conference on Wednesday. Wages are being eaten away by price increases, for one thing.

And inflation, too, is uniquely difficult for poorer families, who have less flexibility to adjust their spending in response to higher prices. That is especially true right now, when inflation is concentrated in essential categories like rent, food and fuel.

“This should not be an abstract conversation,” said Michelle Holder, president and chief executive of the Washington Center for Equitable Growth, a progressive research organization. “This is a very real burden for families, particularly low-income families. People are making tough choices in terms of what do they cut back on, and for lower income families there’s not a lot of wiggle room there.”

Many progressives initially resisted calls for the Fed to raise rates, arguing that the strong labor market — and the rare bargaining power that it gave to workers — was worth a brief period of rapid price increases. That has begun to shift as inflation worsens. Some economists who focus on labor issues now say the Fed is right to try to contain it, but that the government should simultaneously provide support to the families who need it the most.

“The hunger of children is not a necessary cost to pay to bring down inflation,” Ms. Ananat, of Barnard, said.

Republicans, meanwhile, have blamed the Biden administration — and in particular, the $1.9 trillion American Rescue Plan that Democrats passed early last year — for making inflation worse. Many economists, among them Democrats, agree that the spending did drive at least some of the inflation, making the politics of economic aid even more fraught.

The economy remains strong for now, but early signs of a pullback are surfacing. Job growth, while fast, is slowing. Jobless claims, still low, have picked up. Evictions are mounting in some cities where bans have expired, and retail sales fell in May.

“I think we are starting to see indications that the good times are coming to an end for some people,” said Karen Dynan, a former Treasury Department chief economist who is now at Harvard University. “There will be some generalized pain.”

For many families, that pain has already arrived, and it feels very specific.

Brandy Sandersfeld gave birth to a boy in March 2020 — the same week that her older son’s school shut down because of the pandemic, and the month that her husband’s pizza business had to close for good.

After a few months of trying to ride out the pandemic, Ms. Sandersfeld and her husband, Kris, moved to a more rural part of their home state of Arkansas, where they owned some land. Unemployment benefits helped pay for the move, and last year the expanded child tax credit provided a much-needed financial cushion. Those payments ended in January — just before Ms. Sandersfeld, 37, hit a deer in her S.U.V. Replacing it wiped out their savings.

“We were really broke after that, and we just haven’t been able to build anything up,” she said.

Living out in the country, the family has felt acutely the rise in gas prices — a trip to town and back now costs $25 in gas. Mr. Sandersfeld took on a second job this year, leaving her to handle the children while also working from home. They worry about what will happen if the economy slows and one of them loses a job.

Ms. Sandersfeld, the first in her family to go to college, said that before the pandemic, she was proud of having built some stability for her family. Now, she wonders if it is slipping away.

“You always want to do better for your children than what you had, and you want them to have more opportunity and be in a better position in life, and I felt like I was headed that way,” she said. “And now I feel like we’ve been kicked back down the mountain. We have the whole mountain to climb again.”