Stimulus checks and pandemic savings helped Americans deal with inflation for more than a year. Now that safety net is broken and it could trigger a recession.

• Stimulus and boosted savings protected Americans from inflation. But the shield is breaking.
• Households' real income fell below pre-pandemic levels in June, and Americans are saving less, too.

The financial buffer that protected Americans from inflation through much of the past year is fading fast.

The fastest price growth in four decades has slammed Americans' wallets for months, leaving them feeling dismal about the economy and fearing for the worst.

Yet they've had a financial crutch to lean on. Stimulus checks sent throughout the crisis padded account balances. Americans saved cash at record rates during lockdown as in-person spending cratered. Once inflation spiked higher, most households were far better equipped to deal with it than they were before the pandemic.

But after 16 months of elevated inflation, that shield is wearing thin. Data out Friday shows sky-high prices starting to chip away at households' safety nets. Real disposable personal income per capita — the cash each American can spend after taxes and inflation — slid through June to $45,356 from $45,505, the Bureau of Economic Analysis announced. That's the lowest since March 2020, when the immediate hit from the coronavirus pandemic powered widespread job loss. It's also below the highs seen just before the crisis began, signaling households are worse off financially than at the end of the last economic cycle.

Americans are also saving less as they pony up more cash for everyday necessities. The personal saving rate dipped to 5.1% from 5.5% last month, falling further from the pre-pandemic average of about 8%.

The declines underscore just how urgent the fight against inflation has become. Where households had been tapping excess savings to offset rising costs earlier in 2022, even-faster price growth now threatens to reverse the gains made during the pandemic recovery. If it continues unchecked, high inflation could wipe out enough of Americans' cash that it kicks off an entirely new recession.

Americans' spending is still going strong as they use what's left of their boosted savings, and that's created a "historically quite rare" wedge between demand and real disposable income, Arend Kapteyn, global head of economics and strategy research at UBS Investment Bank, said in a July 20 call with reporters. That is, spending has remained strong even while income has slipped, with that gap powered by the shrinking pandemic-era cash savings hoard.

A consumer-led recession or a much-needed inflation cooldown?

The bank sees two possibilities for how the rest of the year plays out for household finances. In the positive scenario, inflation cools off and real disposable income swings higher. That will bring Americans much-needed relief and allow for healthy spending to continue. The economy would avoid a consumer-driven downturn and likely enter a robust expansion phase.

The downside scenario, meanwhile, sees the country plunge into a recession. Should inflation stay elevated, Americans could dramatically pull back their spending to conserve their finances. Real disposable income would slide further as high prices cut further into households' balance sheets. Yet the drop in spending would also pull key fuel out of the economic engine and spark an economic slump.

It won't take long to figure out which scenario is likely to take place. The "wedge" between real disposable income and spending is set to fully fade in "the next few quarters," Kapteyn said.

"All these things are temporarily creating this gap between where real income is running and where consumption is running, but that gap is not necessarily going to be there forever," he said. "Now it's a bit of a race against the clock."

Recent retail sales data supports his forecast. Americans' inflation-adjusted spending at retailers and restaurants dropped in June for a second straight month to hit the lowest sum since December. Put simply, Americans are pulling back.

There's still a way to go before spending drops to worrying levels. Real retail sales are still well above the pre-pandemic trend, and declines have so far been mild. But as inflation gauges accelerate and Americans' cash balances shrink, the war against inflation is becoming more pressing by the day.