Impact of U.S. credit card debt fluctuation, on inflation and the looming recessionary atmosphere
April 2020
Credit card and other revolving debt falls to $739 billion USD, lowest in 4 years.
April 2023
Credit card debt at its highest (nearly 1 trillion USD) and for the first time in 20 yrs. credit card balances haven’t fall at the start of the year 2023.
In a remarkably short span of three years, the levels of credit card debt have swung to the extremes of the spectrum.
In this article we will be discussing the impact of credit card debt fluctuation, on inflation and the looming recessionary atmosphere.
Let’s dive deep into the inflation numbers for basic necessities.
Annual increase in food prices from April 2022 to April 2023
- Eggs: +21.4%
- Frozen vegetables: +18.9%
- Flour and prepared flour mixes: +17.8%
Comparison with Pre-pandemic levels
We see a fall in inflation rate between April 2022 and April 2023 but the inflation rate for food, electricity, and apparel sectors in April 2023 remains 10 times higher than pre-pandemic levels. This signifies a significant surge in prices for these essential consumer goods. Inflation in shelter is a different story altogether you can watch this YouTube video by CNBC to have a brief idea of the situation.
How did we end up here? Where is the money coming from?
In Apr-20, US Personal savings reached an all-time high of $6428 Billion USD, with lockdown all around the globe due to the pandemic, people couldn’t spend money hence they start paying off their debt, lowering credit card and other revolving debt to $739 billion USD, lowest in 4 years.
When the economies around the world started to reopen with the supply chain issues, high personal savings, low credit card debt and a strong desire to spend after the extended lockdown it created the perfect atmosphere for inflation of goods and services.
The onset of the pandemic had a significant impact on blue-collar workers, businesses were closing so they were laid off, which can be validated by the surge in median wages during Q2 2020 when unemployment was at its peak. As businesses began reopening, there was a sudden increase in demand for blue-collar workers, leading to a sharp decline in the unemployment rate. Surprisingly, wages did not decrease in parallel, indicating that blue-collar workers were able to negotiate favourable terms. Consequently, workers now possess savings and enjoy a stable income stream, which has overall strengthened their financial situation.
At first the spending was supported by savings and wages, but with rapid rise in inflation, wages became less competitive and savings level plummeted so people went back to credit.
In June 2022 savings fell below the 10Yrs level to $506 billion USD and by May 2023 credit card debt reached an all-time high of 986 billion USD.
Looking at the last few months of 2022 and early 2023 it seems it has dawned upon people that their savings is way below the pre-pandemic levels. Hence, we see a slow rise in savings level.
The impact of these factors is evident in the inflation numbers. While inflation has begun to decline since August 2022, the first four months of 2023 have witnessed a significant decrease in the inflation rate for food at home and electricity categories. In fact, the rate of decline in inflation for these categories during this period is more than twice the rate observed in the last five months of 2022. Rate of growth of inflation in shelter has also dropped by 5x.
People are under pressure to save and have started, but the rise in apparel after sharp drop till December indicates they are still willing to spend when they come across attractive deals or favorable pricing.
Will this sharp fall in inflation continue?
To provide a comprehensive answer, it is important to consider multiple factors. However, one significant factor that will influence the trajectory of inflation is how people utilize credit. This is particularly relevant as there has been a notable increase in the number of accounts taking credit card loans since Q1 2021.
In figure 5 for the period from 2020 till mid 2021(peak period of the pandemic) we can see fluctuation in savings levels but credit has constantly remained low.
The fluctuations in savings levels can be attributed to the unemployment rate during the pandemic. However, a particularly noteworthy trend was people consistently avoided borrowing money during the period increasing overall credit score average to 715 in 2021 as per statista.
Even though credit card debt has reached an all-time high, the average balance carried by households remains at pre-pandemic levels. Unlike in case of savings, people aren’t in uncharted territory. In the past, they carried similar balances and have successfully paid off, giving them confidence in their financial situation.
Why are the card companies still lending?
Delinquency rate on credit card, is at 2.43% in Q1 2023, although it has increased sharply but it’s still lower than the pre-pandemic levels of 2.69% in Q1 2020. So, credit card companies are comfortable lending and are also increasing credit limit to keep credit utilization lower, thus better credit score for their customers.
What next?
Up until people have access to credit and source of income, they will be oscillating between savings and credit, leading to stagnant phases and slow decrease in inflation rate, unless there is an event which influences the world economy, like sharp fall in housing.
Once the credit card balance goes beyond people’s comfort zone, we can anticipate a slowdown in credit utilization. However, the timing of this adjustment is crucial.
Over the past 20 years, there has been a trend of increase in consumption during the holiday season compared to the rest of the year, specifically in Quarter 4.
If the realization comes close to the holiday season, Q4 2023, with impulsive buying during the quarter, we will see the gap widening between credit and savings.
People will be forced to stop spending because they don’t have any savings left and are deep in credit card debt, this may lead to a recessionary atmosphere and an unhealthy drop in inflation rate.
On the other hand, if the realization comes earlier, people will be better prepared for the months following the holiday season, we will see higher rate of drop in inflation rate compared to current times and hopefully no recessionary atmosphere.
