The inflation problem that won’t go away

For the past two-and-a-half years high inflation has been the constant nemesis to the American consumer. It all started in March 2021, when inflation jumped from 1.7% to 2.6%. Any inflation rate above 2% is deemed excessive and causes undue harm on consumers, business and, ultimately, the American economy. By June 2022, inflation had peaked at 8.9%, a 42-year high. 12 months later, in June 2023, inflation had subsided to 3%. But then it caught its second wind. In July, inflation jumped from 3% to 3.2%. In August, it rose even higher to 3.7%.

On Thursday, the Department of Labor released its Consumer Price Index for September. The report showed that last month consumer prices rose another 0.4%, marking the 40th consecutive monthly increase in consumer prices. The national rate of inflation remained unchanged at 3.7%, though Wall Street was expecting the rate to slightly decline to 3.6%.

September’s rise in prices was led by the higher cost of shelter, which increased another 0.6% last month. Over the past 12 months, shelter costs have risen a massive 7.2%. Higher food prices, which have risen 3.7% over the past year, were also a contributing factor.

The latest data reaffirms that high inflation (above 2%) has become increasingly imbedded within the U.S. economy. The last time inflation was reported below 2% was back in February 2021 (1.7%). Just a few weeks ago, the Federal Reserve acknowledged that high inflation will likely persist through the end of 2026 – another three more years.

Higher-for-longer inflation means the Federal Reserve will likely have to keep interest rates higher-for-longer. In its efforts to try and tame inflation, the Fed has been aggressively raising interest rates. Since March 2022, the Fed has raised the benchmark fed funds rate from near-0% to its current level between 5.25%-5.5%, a 22-year high.

The fed funds rate serves as the basis for many forms of consumer debt. The Fed hopes that raising interest rates will help quash consumer spending by making it more expensive to buy goods and services on credit. As consumer spending falls, inflationary pressures should likely ease.

As a result, the cost for consumers to borrow money has soared, especially for home buyers. According to data from Bankrate, the national average interest rate on a 30-year fixed home mortgage is now 7.8%. Two years ago, the average rate was around 2.75%. Assuming a consumer buys a $225,000 home and puts down a 20% down payment, this would increase their monthly principal and interest payment by $562, or $6,744 per year. That’s a significant added financial burden being placed on American households.

The national average interest rate on a HELOC has also risen to 9.01%. Likewise, the average interest rate on a four-year auto loan for a new car is 7.5%. For a used car, it’s 8.2%.

Despite high inflation and high interest rates, consumer spending has held up fairly well. But cracks are starting to form. Household debt is at a record-high $17.06 trillion. Credit card debt is at a record-high $1.03 trillion, the first time ever outstanding credit card debt has breached the $1 trillion mark. According to Epiq Bankruptcy, a leading provider of bankruptcy analytics, 313,458 individuals filed some form of bankruptcy protection in the first nine months of 2023, up 17% from last year.

So far, the American consumer has shown tremendous resiliency. But that resiliency is not indefinite. At what point do consumers simply say, “no more” and start closing up their pocketbooks?