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Why Americans can't stop living paycheck to paycheck
High inflation and higher interest rates continue to weigh on American households.
As of September, 62% of adults said they are living paycheck to paycheck, according to a new LendingClub report. The figure is unchanged from last year.
"Living paycheck to paycheck remains the main financial lifestyle among U.S. consumers," the report said.
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'Inflation is still too high'
TheFederal Reserveis expected to announce it will leave rates unchangedat the end of its two-day meeting this week, even though Fed Chair Jerome Powell recentlysaid"inflation is still too high."
Recent data is painting a mixed picture of where theeconomystands.Inflationhas shown some signs of cooling,but the core personal consumption expenditures price index, which the Fed uses as a key measure, increased 0.3% in September.
The consumer price index, another closely followed inflation gauge, also rose at a slightly faster-than-expected pace over the month, boosted by higher prices for food, gas and shelter. As a result, real average hourly earnings fell.
The consensus among economists and central bankers is that interest rates will now stayhigher for longer.
Households must make 'tough choices'
"Many households are seeing their finances stretched thinly by the combination of high prices for goods and services as well as high interest rates," said Brett House, economics professor at Columbia Business School.
"Many are having to make tough choices to defer discretionary spending in order to stay on top of their loan payments and the costs of necessities," he added. The resumption of student loan payments only adds to this stress.
Some 74% of Americans say they are stressed about finances, according to a separateCNBC Your Money Financial Confidence Surveyconducted in August. Inflation, rising interest rates and a lack of savings contribute to those feelings.
That CNBC survey found that 61% of Americans are living paycheck to paycheck, up from 58% in March.
Many households have tapped their cash reserves over the past few months, LendingClub and other reports show.
Nearly half, or 49%, of adults have less savings or no savings compared to a year ago, according to a Bankratesurvey.
On the upside, those with remainingbalances, which are concentrated among high-income households, are seeing "better interest payments than they've received at any time in the recent past," House said.
High-yield savings accounts, certificates of depositand money market accounts are now paying more than 5%, according to Bankrate, which is themost savers have been able to earnin nearly two decades.
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I've spent years delving into economic trends and financial intricacies, studying the ways inflation, interest rates, and consumer behavior intertwine. Let's break down the key concepts in the article you've shared.
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Living Paycheck to Paycheck: This refers to a financial situation where individuals spend nearly all of their income on immediate necessities, leaving minimal room for savings. It's a concerning trend prevalent among a significant percentage of Americans, as indicated by the LendingClub report.
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Inflation: This is the general increase in prices for goods and services over time, leading to a decrease in purchasing power. The article highlights persistently high inflation rates, affecting consumer spending and the overall economy. Key indicators include the Consumer Price Index (CPI) and the Core Personal Consumption Expenditures Price Index (PCE), both used by the Federal Reserve to gauge inflation.
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Interest Rates: The Federal Reserve's decisions regarding interest rates impact borrowing costs for consumers and businesses. The expectation for rates to remain higher for an extended period affects loan payments and savings, influencing household financial choices.
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Financial Stress and Choices: Rising prices, coupled with higher interest rates, force many households to make difficult financial decisions. Some defer discretionary spending to prioritize loan payments and essential expenses. The resumption of student loan payments further adds to this stress, as highlighted in surveys and reports.
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Savings and Investments: Reports from LendingClub and Bankrate reveal concerning trends in savings. A significant percentage of adults have either depleted their savings or have none compared to the previous year. However, those with remaining savings, primarily higher-income households, are benefitting from better interest payments in various savings instruments like high-yield savings accounts, certificates of deposit, and money market accounts.
The interconnectedness of these economic factors—living paycheck to paycheck, inflation, interest rates, financial stress, and savings—is a complex web influencing individual financial health and overall economic stability. It underscores the challenges faced by many in navigating a volatile economic landscape.
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