Following the May Consumer Price Index coming in hotter than expected and pushing back considerably on the notion inflation had peaked, the odds for a 75-point rate hike by the Fed at its monetary policy meeting this week jumped to 20% from 5%. Should the May Producer Price Index similarly quash the view that inflation peaked, we would expect those odds to move even higher. The thought being the Fed will need to move more decisively to get a grip on inflation, but it’s a delicate balancing act as the faster the Fed moves interest rates higher, worries it will send the economy into a tailspin will climb as well. Fed Chair Powell will have his work cut out for him as he looks to overcome growing Fed criticism as he updates investors, economists, and traders on the Fed’s plan of action during the post monetary policy meeting press release.
As interest rates tick higher, and especially if they do so at an even quicker pace than previously expected, it means borrowing costs for consumers will march higher as well. The risk is that puts a crimp in consumer purchasing power as more after-tax dollars are gobbled up by interest payments, especially as credit card balances are rising and credit card holders are taking more time to pay down debt.
The April consumer credit report showed consumer borrowings rose by $38 billion on a seasonally adjusted basis to $4.57 trillion, a new record -- and beating the expected $35 billion increase. The feat marks the third consecutive month of gains above $30 billion. Revolving credit, which is mostly credit card debt and tends to account for nearly a quarter of all consumer debt, rose at a brisk 19.6% in April, more than a tad faster than the 16.8% increase posted in the first three-months of 2022. That said, while the April rate of growth was slower than the 29% jump registered in April, it still points to a rapid increase in consumer borrowings and one that is far faster than that for the first two months of the year.
That uptick in revolving credit growth in March and April vs. combined with January and February meshes with the inflationary pressures we saw as a result of the Russia-Ukraine war, rising oil prices and subsequent gas prices, and renewed supply chain woes. Compared against the drop in the April personal savings rate as well as the personal spending data, the new numbers likely show that consumers are taking on credit card debt to fund their purchases. Indeed, that is what we see over at USDebtClock.org (one of the scariest websites around if you ask us), which shows the average credit card debt per holder is $6,903 up from $5,315 in 2020, according to data published by Value Penguin.
As we suspected given the run-up in gas prices during May, the consumer price index report for the month topped expectations for both the headline as well as the core figure. Digging into the report, we find price increases were broad-based, including price jumps for used cars and trucks and new vehicles, which many thought would be softening. The food index saw its largest 12-month increase (10.1%) since March 1981, and rising energy costs continue to challenge the peak inflation narrative. For those who were thinking the Fed may raise interest rates at its June and July meetings and then take a pause, the May CPI report clearly calls that into question, especially gas prices have only moved higher thus far in June.
Putting those two economic reports together, the upward trajectory in borrowing costs associated with those higher consumer borrowings means higher monthly debt service payments are going to be had in the coming months compared to earlier this year. In other words, a headwind that is poised to strengthen as consumer are already feeling higher energy and food costs smack their spending dollars.
Adding fuel to that fire, the University of Michigan’s preliminary June sentiment index reading fell to 50.2 from 58.4 in May, well below the expected 58.1 reading. Inside that report, a much watched Federal Reserve indicator of consumer inflation expectations also moved higher with 46% of respondents attributed their negative views to persistent price pressures. Consumers signaled the growing likelihood inflation will eat into their incomes, and they don’t see it abating any time soon. That in turn is likely to lead to consumers trading down in products and voting with their feet to shop at places that allow them to stretch the spending dollars they do have.
Odds are the May Retail Sales report will reveal what many have suspected - consumers are paying more for less. Don’t even get us started about how the price of a pound of coffee now only gets you 10 ounces.
As consumers look to fend off the pain of increasingly wider spread inflation, we see them leaning into companies captured by our Consumer Inflation Fighters model. Given concerns over consumer spending and bloated retailer inventory levels, we are eyeing a few moves with the model. We would also note that Boxed (BOXD) shares being added to the Russell 2000, which should help alleviate some of the pain the shares have been under since the company filed a secondary offering. Similar to Amazon (AMZN) and its “deflationary Deathstar” status, Boxed’s buy in bulk, e-commerce business should continue to attract consumer attention in the current environment. As the stock offering comes and goes, we would expect to see BOXD shares rebound.
Other notables for our Consumer Inflation Fighter model:
Consumers changing eating, shopping habits as inflation pushes up prices
Walmart Sees Shift to Private-Label Groceries Amid Rapid Food Inflation