ELMORE: Consumers Are Spending Down To Their Last Penny And Then Some

by | Jun 3, 2024 | Opinion

By Daniel Elmore

American spenders are in a standoff with the Federal Reserve, and inflation keeps climbing.

Despite the Federal Reserve raising interest rates to their highest point in the past two decades, inflation continues to burn through American’s wallets. Yet, consumers seem to be unwavering in their spending habits as seen with continued increases in retail sales and household debt as consumer savings decline over the past year.

Recent data from the New York Federal Reserve’s Center for Microeconomic Data indicates that households accumulated almost $17.7 trillion in debt by the end of March. This marked an increase of roughly $184 billion from the end of 2023. Mortgages were the primary driver of this growth, with an increase of $190 billion from the end of 2023. However, there were slight decreases in credit card balances, student loans, and other unclassified forms of debt.

More and more consumers depend on credit cards to make up for the heightened cost of living. While the reported increase of household debt is not as substantial in this most recent report as in previous editions, delinquency rates across various debt categories are concerning. In particular, the surge in severe delinquency rates among credit card holders parallels levels not witnessed since the Great Recession. Credit card balances have nearly doubled in size since the Great Recession.  Yet, with personal savings dwindling to just $671 billion, comparable to levels faced in 2010 in the aftermath of the Great Financial Crisis, Americans are left with few alternatives.

Americans will not see relief from high interest rates anytime soon. The latest data on the Producer Price Index, which measures wholesale inflation, revealed a monthly increase almost double what analysts expected. In April, the index rose by 0.5% month-over-month and marked a 2.2% year-over-year increase, the fastest annual rise since April 2023.

Many Americans believe the reported inflation rate fails to accurately portray the true impact of inflation on their finances. They’re not all wrong. For instance, the Bureau of Labor Statistics reports a more than 10% decline in health insurance costs over the past year, equal to health care costs in January 2019, yet, families continue to face higher premiums.

Likewise, the Consumer Price Index substantially underestimates shelter costs for homeowners by employing a methodology known as Owners’ Equivalent Rent, where homeowners estimate the hypothetical monthly rental cost of their residence. Despite this metric rising by only 20.4% since the start of the Biden Administration, empirical data shows that the monthly mortgage payment on a median-priced home has more than doubled.

Regardless of the situation on the ground, Chairman Jerome Powell continues to assert that the Federal Reserve is “committed to bringing inflation back down to [their] 2 percent goal and to keeping longer-term inflation expectations well-anchored.” This comes despite the fact Powell has been a notable “dove” at the Federal Reserve, advocating for up to three interest rate cuts by the end of this year.

The Federal Reserve is at a standoff with American consumers.While both have remained steadfast in their ways, soon one of them will have to yield.

The Fed, faced with seemingly relentless inflationary pressures, may opt for the politically expedient route of rate cuts, potentially exacerbating the inflationary spiral and placing further strain on households.

Conversely, consumers may find themselves compelled to curb spending and adjust their lifestyles to navigate the economic turbulence. Signs of this restraint are already evident, with recent dips in retail sales and a significant portion of Americans tightening their belts due to economic uncertainties. Even still, further tightening from consumers may still be necessary.

Regardless of which party ultimately gives in, the consequences of this stand-off will be universally felt.

Daniel Elmore is a Young Voices contributor studying economics at George Mason University. His commentary has appeared in the Washington Examiner, RealClearMarkets, and Carolina Journal. Follow him on X (formerly Twitter): @daniel_j_elmore

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