American Financial Confidence Hits A Four-Year Low, Here's Why...

By Lisa Pelgin | Saturday, 25 May 2024 04:10 PM
Views 1.7K
Image Credit : UT Southwestern Medical Center

The specter of inflation may be receding, yet the proportion of Americans who consider themselves to be "financially stable" has plummeted to a nadir unseen in four years.

As per the latest annual survey conducted by the Federal Reserve, released on Tuesday, a mere 72% of American adults claimed to be "doing OK" financially in 2023, marking the lowest figure since April 2020. This sentiment has been on a downward trajectory since 2021 when the figure stood at a healthier 78%.

Parents, in particular, have felt the pinch. The percentage of parents with children who believe they are financially stable has seen a significant drop from 69% in 2022 to 64% in 2023.

Inflation has been identified as the primary culprit behind this financial strain. Of the 11,400 respondents to the survey, 35% cited rising prices as the "main financial challenge" of 2023. This concern trumped other financial worries, including retirement savings and debt.

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While wage growth has managed to outstrip inflation since the beginning of 2023, the survey indicates that the cumulative impact of high inflation over the past few years has strained household finances.

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Inflation, after peaking at a year-over-year rate of 9.1% in June 2022, has been hovering around 3% for nearly a year, as per the consumer price index (CPI), which monitors the cost of commonly purchased goods and services. Over the past three years, CPI inflation has surged by 18%.

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Despite the inflationary pressures, consumer spending has remained robust, although signs of strain are beginning to emerge. In March, spending increased by 0.8%, outpacing income growth, which only rose by 0.5%. This suggests that Americans are living beyond their means, a trend that has been observed monthly since late 2023.

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The Fed's survey corroborates these findings: while 34% of respondents reported an increase in their income over the previous year, 38% admitted to spending more.

Simultaneously, savings have taken a hit. The proportion of income that consumers save has been on a downward trend over the past few months, standing at 3.2% as of March, roughly half of the pre-pandemic rate.

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As savings have dwindled, personal debt has risen, with credit card and auto loan delinquencies surpassing pre-pandemic levels. These delinquencies have exposed "worsening financial distress among some households," according to a New York Fed official's blog post on the trend.

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Federal Reserve Chair Jerome Powell, in a recent speech, expressed cautious optimism that inflation will continue to slow down towards the Fed's target of 2%.

"We've made a lot of progress," he stated. "And we have a ways to go. We've got work left to do, but we're not looking at the very high inflation rates that we were seeing two years ago."

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