Inflation Hits Middle- and Lower-Income Americans Hard

ByHuey Yee Ong

Feb 8, 2024 , ,

While the U.S. economy as a whole continues to show signs of health, certain segments of the population, predominantly lower- and middle-income Americans who are often renters, are facing financial challenges exacerbated by more than two years of battling inflation. Experts express concerns that these groups are depleting their savings and accumulating credit card debt, potentially leading to worsening financial situations in the coming year, especially for those who have recently resumed paying off student loans.

Credit Card Debt on the Rise

Shernette McLoud, an economist with TD Economics, noted that the U.S. economy has outperformed expectations thanks to a resilient consumer base. However, there is a growing trend of consumers relying on credit cards to finance their spending. In the third quarter of 2023, Americans collectively held over $1.05 trillion in credit card debt, a record-high figure that is expected to increase once the Federal Deposit Insurance Corp releases fourth-quarter data. A recent report from Moody’s indicates that credit card delinquency rates and charge-off rates, representing loans that banks believe will not be repaid, have exceeded 2019 levels and are predicted to continue rising.

This concerning situation is compounded by the fact that the average interest rate on bank credit cards stands at approximately 21.5%, the highest since the Federal Reserve began tracking this data in 1994. Silvio Tavares, president and CEO of VantageScore, one of the major credit scoring systems in the country, acknowledged that while the overall consumer credit health is sound, there are evident signs of stress among certain segments of the population.

Financial Challenges for Renters

Analyses of Americans’ financial well-being reveal a stark contrast between two groups. On one side, approximately two-thirds of Americans who own homes and have investments in the stock market have fared relatively well during the period of high inflation. They had the financial cushion needed to weather the storm, with delinquency rates on single-family homes remaining historically low, and home prices continuing to rise.

However, for the remaining segment of the population, the outlook is less optimistic. Middle- and lower-income renters, who have not benefited from the wealth effect of rising housing and stock prices, are experiencing financial stress due to the impact of inflation. Warren Kornfeld, a senior vice president at Moody’s, anticipates that delinquency levels among this group will continue to rise throughout the year.

The financial health of consumers is poised to play a significant role in the upcoming 2024 election. President Biden is campaigning on his efforts to reduce costs for American families, while Republicans argue that Biden’s policies are responsible for the rising costs.

To illustrate this economic divide, one can examine the performance of major credit card companies. Capital One, Discover Financial Services, and Synchrony traditionally cater to customers with lower credit scores, while American Express serves a wealthier clientele. Synchrony Bank, the largest issuer of retail co-brand credit cards, has seen its charge-off rate increase from 3.5% to 5.6% in a year, with approximately 4.7% of its customers falling 30 days or more behind on their bills. Discover’s customers are carrying $102 billion in credit card balances, a 13% increase from the previous year, accompanied by rising charge-off and delinquency rates.

The Impact of Inflation

Inflation, which peaked at 9.1% in June 2022, remains elevated, with the costs of many goods and services still higher than in previous years. Renters have been particularly affected, with the median rent for properties with up to two bedrooms increasing from $1,424 at the end of 2020 to $1,713 at the end of the last year. The recent reintroduction of student loan payments has the potential to further hinder the ability of these financially stressed customers to repay their debts.

Even American Express, which historically served high-credit-score customers who paid off their balances each month, has witnessed an increase in charge-offs and delinquencies. Their net charge-off rate in the last quarter was 2%, up from 1.2% a year earlier.

JPMorgan Chase and Bank of America, two major banks with diverse customer portfolios, have experienced only modest increases in their credit metrics. This is likely because their clients come from various income levels and credit score categories. However, both banks have set aside more money to cover potential loan losses, primarily related to their credit card portfolios.

Economic Implications and Future Outlook

The prospect of relief from banks or interest rate reductions for consumers facing high-interest debt seems unlikely in the near future. The Federal Reserve has indicated that its first interest rate cut is still months away, and credit card interest rates remain significantly higher than the rates the Fed charges for loans. Additionally, banks have become more conservative in issuing loans, making it less likely that Americans can refinance their high credit card debt into lower-interest loans.

Currently, economists do not believe that the financial strain experienced by lower-income Americans will significantly impact the broader economy. However, rising delinquencies represent a growing risk for the economy in the coming year, especially if younger, debt-burdened Americans struggle to manage their student loan payments.

In conclusion, while the U.S. economy appears robust on the surface, there are underlying issues affecting certain segments of the population, particularly lower- and middle-income Americans. These individuals, often renters, are grappling with inflation-induced financial challenges, including increasing credit card debt. The divide in financial well-being between different groups of Americans is a significant concern, and the impact of these economic challenges may play a role in the upcoming 2024 election. Economists are closely monitoring rising delinquencies as a potential risk to the economy, especially if younger Americans find it difficult to manage their student loan payments.

Featured Image courtesy of Drazen Zigic on Freepik

Huey Yee Ong

A creative enthusiast who enjoys art, baking, and sports, delivering insightful reporting with a fresh and unique perspective.