It is not rocket science to expect revolving debt to grow as inflation takes hold of the consumer budget. The latest Consumer Price Index (CPI) indicates that the cost of food is up by 10.4%, energy costs rose a whopping 41.6%, and all items tracked by the Bureau of Labor Statistics for all items rose 9.1% as of June 2022. How will this affect credit card balances?
If you are Joe or Jane Average, your annual mean wage across all occupations is $22.00 an hour, or $58,200. Remember, that rate includes a wide range of people, ranging from “doctors, lawyers, and Indian chiefs” to “butchers, bakers, and candlestick makers.”
What is a household to do with a gallon of milk now averaging $4.27 in Boston as of July versus $3.54 in January 2022? Consider yourself lucky not to be in Washington, DC, where the average gallon of milk is now $5.04. And, why, of all places, does a gallon of milk in Kansas City, Missouri, cost $6.01, where the state recognizes that it has 71,000 dairy cows? That is another story for another day.
The response surely should not be to blame your credit card company. It would help if you also did not blame the Federal Reserve, which has the challenging role of managing interest rates to curtail inflation. If you are Joe or Jane Average, you should thank your bank for the credit card cushion and Jerry Powell for trying. Yes, interest rates are on the uptick, but in almost all cases, the credit card APR ties to the prime rate. It was nice when the prime rate was 3.25%, but it hurts when the prime rate rises. Today, the prime is at 5.5%. Perhaps consumers should expect it to hit 6.5% before year-end.
In today’s news cycle, you will find a raft of articles, ranging from CNBC, which claims that “20% of Americans are afraid to check their credit card statements as interest rates approach an all-time high.” At Reuters, you will see that “inflation begins to strain finances of young, low-income Americans,” Fortune talks about “Americans are putting inflation on their credit card.” The Washington Post proclaims, “Credit card debt surges as inflation drives up costs.”
Ok, we have it.
Inflation will disrupt the household budget. Do not blame your banker when your credit card balance climbs. Be happy they are in place to bear the risk as recession comes and today’s 3.8% unemployment rate rises as we approach 2023. The banker will be contending with increasing credit losses. Yes, indeed, consumers will pay more as the Fed raises rates. They still need to fill their tanks and pantries, so as those prices climb, so will revolving debt. And for the banker, expect risk ahead as the economy continues to navigate rough waters.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
