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BFI Capital
June 27, 2024

US Consumers Under Siege

In mid-June, President Biden posted the following on his X account: “Zero. That was monthly inflation in May. There is more to do still, but this is welcome progress.” Do you believe it?

This statement is entirely misleading. Inflation is measured and reported as a rate of change not as an absolute value. Consumer prices actually rose 3.3% in May compared to 1 year ago. Services, shelter, and electricity all increased by 5.3%, 5.4%, and 5.9%, respectively. Just because the price increase rate is lower does not mean that prices are actually decreasing - it simply means that they are increasing at a slower pace than they were before. Most of our readers and clients clearly understand this all-important distinction and can see through this blatant attempt to appease voters. However, a very large percentage of the general public (perhaps a majority even) is likely to take this assertion at face value.

This creates a very disturbing cognitive dissonance in the mind of the average consumer, taxpayer, and voter. Their own political leaders and institutions are asking them to doubt the evidence they are seeing with their own eyes. Inflation is not under control by any stretch of the imagination and all those ordinary people who see their paychecks vanish prematurely every month realize it. What they’re told versus what they experience are two very different things and they are increasingly choosing to rely on their own common sense.

Indeed, we’re seeing a number of trends that confirm this. The University of Michigan Consumer Sentiment Survey recently hit its lowest mark in seven months, with June’s index reading at 65.6, down from May’s 69.1 and significantly below the consensus expectation of 72. According to Survey of Consumers director Joanne Hsu, “assessments of personal finances dipped due to modestly rising concerns over high prices as well as weakening incomes”. Olivia Cross, Capital Economics economist concurred that the reading showed "households are now struggling more under the weight of higher interest rates and still-elevated consumer prices."

It doesn’t stop there. According to a recent Consumer Trends survey by HubSpot, consumers are tightening their belts and bracing for a recession: “57% think the U.S. is currently in a recession, and 55% are tightening their budgets in response. About half (47%) of U.S. adults have taken steps to plan or prepare for a recession. Additionally, 42% of consumers expect the recession to last for over a year.” This explains why they are drastically cutting back on non-essential expenses. As the survey highlighted: “Of respondents, 45% are spending less money on non-essential items and focusing only on purchases critical for survival or well-being. There's also a big demand for long-lasting products. When people buy something, they want it to endure and not have to be replaced soon after.”

This is a very worrying shift not just in public opinion, but in actual spending and consumer behavior, which can have far-reaching consequences. We’re already seeing this reflected in the extremely high levels of consumer debt and in the rise in delinquencies. A year ago, severe delinquencies, i.e., credit card debt that’s more than 90 days overdue, represented 8.2% of credit card debt. In the first quarter of 2024, this number rose to 10.7%, the biggest we’ve seen since 2012. At the same time, total credit card debt ballooned to $1.12 trillion from just under $1 trillion last year.

These are all brightly flashing warning signs that ordinary households are seriously struggling to make ends meet. These trends also make it very difficult for the Federal Reserve to keep postponing the widely anticipated rate cuts. In an election year, it is a political imperative, not only to appease the average voter, but also to curry favor with the corporate and investment world. The US stock rally is bound to run out of steam as company debt is also largely unsustainable.

However, by choosing this shortsighted path and cutting rates before inflation is actually tamed, in practice and not just in theory (that is, in CPI calculations that are hardly representative of the real economy), the central bank risks unleashing an inflationary wave that will make the cost-of-living crisis of the past few years pale in comparison.

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