The most recent numbers on U.S. inflation, which the Bureau of Labor Statistics (BLS) tracks, is that the Consumer Price Index (CPI) rose by 0.6% in May 2021. The 12-month increase was 5..0% for all categories, with food increasing 2.2%, energy surging 28.5%, and all items excluding food and energy climbing 3.8%. On a blended basis, the CPI index grew by 4.2$ between April 2020 and 2021.
The question is how long the trend will last and where it will level off.
Suppose you ask Jerry Powell, the Federal Reserve Chair. In that case, you might feel fine when he says: “Our best view is that these effects on inflation will be neither particularly large nor persistent.”
However, if you speak to Chase’s Jaime Dimon, you may become unsettled, as Barron’s mentions his comments at a Morgan Stanley conference: “he expects to see higher rates and more inflation. To prepare, he’s keeping a little extra cash on the balance sheet—about $500 billion. “Our balance sheet is positioned and will benefit from rising rates,” Dimon said.
You can probably see price changes in your consumer purchasing today. At the grocery store, slight increases are evident in things like milk, eggs, and meat. At the gas pump, AAA reports that the average price for regular gas is currently $3.075, versus a year ago at $2.103. And, so it goes, as Kurt Vonnegut would say.
S&P points out that “the right balance of inflation and economic growth is important for a healthy economy,” which makes sense. People need to get raises, and with that, prices will naturally increase, but they have to work in tandem.
Inflation hits consumers and their ability to service their debt obligations from several angles. First, the consumer may feel the pain less if they have credit available, which many do today, as we know from the stagnant growth in revolving debt. Open credit lines measure in the trillions of dollars. But then, stack on future months of small increases, and the storm brews.
On top of paying more and carrying more debt, consider what happens when interest rates rise. With most credit cards pegging their interest rates to the Prime Rate, a perfect credit risk storm may be brewing with rising rates, rising prices, and rising debt levels.
The consumer burden is something for credit card issuers to watch from a risk management perspective, but there are three downfield opportunities for financial institutions to consider.
- Keep a steady eye on the merchant processing function. Inflation brings incremental merchant revenue, but it will increase pressure on margins, perhaps creating the opportunity to shift processing volume to more efficient merchant partners.
- Advancing risk management technologies are essential, particularly as eCommerce continues to grow and Card Not Present fraud outpaces the growth.
- Buy Now Pay Later offers two learnings for bankers: micro-loans have a certain appeal, and alternative credit options will yield more buyers. In both cases, though, bankers must consider their credit standards.
On the inflation issue, Jaime’s view is probably the most insightful. Once inflation starts, it begins to spiral, and the question goes back to how long and by how much. But looking ahead, there needs to be a balance of credit risk management and market opportunity.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
