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Credit card balances top pre-pandemic peak as inflation hits

Consumers continue to take on credit card debt as inflation increases their spending.

Consumer revolving debt — which is mostly based on credit card balances — gained $14.8 billion on a seasonally adjusted basis in June.

It is now at $1.125 trillion, surpassing its pre-pandemic peak, according to the Fed’s Consumer Credit Report G.19 released Aug. 5.

In June, inflation rose 9.1% on the year (and 1.3% from May levels), meaning consumers had to shell out more money to buy goods.

Given that consumers typically use their credit cards to pay for gas, this is likely a major factor behind the increase in outstanding credit card balances in recent months.

Outstanding balances would increase at the end of the month, even if consumers paid off their card balances when due.

In June, card balances rose 16% on an annualized basis, following May’s 7.8% (revised) gain and April’s robust 19.6% jump.

Total consumer debt — which includes student and auto loans, as well as revolving debt — rose $40.1 billion to $4.627 trillion in June. That’s a seasonally adjusted annualized increase of 10.5%.

Household debt continues to rise

In its quarterly household debt and credit report, the Federal Reserve Bank of New York finds total household debt rose 2% in the second quarter, rising $312 billion to $16.15 trillion. .

Credit card debt hit the $890 billion mark.

Credit card balances grew by $46 billion during this period, a 13% increase from the second quarter of 2021, the biggest jump in more than 20 years.

And 3.35% of credit card debt went into serious default (90 days or more past due) in the second quarter, up from 3.04% in the first quarter.

The increase in household debt is partly due to rising prices, according to Joelle Scally, administrator of the New York Fed’s Center for Microeconomic Data.

“While household balance sheets appear to be in good shape overall, we are seeing an increase in defaults among risky and low-income borrowers with rates approaching pre-pandemic levels,” Scally says.

Loan officers expect to tighten credit standards

The Federal Reserve’s July survey of senior loan officers on bank lending practices, covering the second quarter, finds lending standards on credit card loans have not changed during this period , while the demand for credit cards has increased.

Officers said their standards were easier compared to historical standards. And some banks had raised credit limits on cards.

For the second half of the year, however, banks expect to tighten their lending standards for credit card loans.

One of the reasons for this is an anticipated reduction in the ability of borrowers to repay their debt, due to a higher risk of inflation. Banks are also worried about a reduction in the credit quality of their loan portfolios.

Banks have also raised concerns about their ability to offload loans to capital markets.

They pointed to a decline in their risk appetite and increased exposure to interest rate risk due to inflation.

Consumers’ long-term inflation expectations fall

The New York Fed’s June Consumer Expectations Survey finds median consumer inflation expectations for the year ahead rose to 6.8% from 6.6% in May, a peak for the investigation.

However, inflation expectations for the next three years fell to 3.6% from 3.9%. And expectations for the next five years fell to 2.8% from 2.9%.

Consumers expect their household income to increase by 0.2 percentage points, at the median, to 3.2%. However, they expect their spending to increase by 8.4%, a decline of 0.6 percentage points.

More respondents find it harder to access credit than a year ago, and more expect it to be harder to access credit in the coming year.

Their average perceived likelihood of missing a minimum debt payment over the next three months increased by 0.2 percentage points to 11.3%.

Consumers were also more pessimistic on the labor market front, with average expectations that U.S. unemployment will be higher in the coming year, rising 1.8 percentage points to 40, 4%.

This would be its highest level since the pandemic period of April 2020. More people feared losing their jobs, and fewer expected to voluntarily leave their jobs.

The labor market remained dynamic in June

Contrary to consumer pessimism, the government announced that the US economy added 528,000 jobs in June.

Job gains were broad-based across almost all sectors, bringing employment back to pre-pandemic levels.

The unemployment rate fell from 3.6% to 3.5%, while the participation rate (the proportion of working-age adults who are working or actively seeking work) fell to 62.1%.

In June, the average hourly wage increased by $0.15, up 0.5% from May, to reach $32.27, up 5.2% from last June. The government also revised job gains upwards for May (up 2,000 jobs) and June (up 26,000).

Commenting on the jobs report, Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted in his email commentary that the rise in hourly wages will not please the Fed, as it is not a sign of moderation. of inflation.

And in a blog post, Diane Swonk, chief economist at KPMG US, noted: “The unemployment rate fell to its all-time low in February 2020.

“This increases pressure on the Federal Reserve to aggressively raise rates again in September. Another 75 basis point hike is likely.