The Impact of Inflation on Consumer Behavior

Welcome to the Market Pulse podcast. I'm your host Thomas Aliff, team lead for the Equifax Risk Advisors team. This group identifies economic considerations and leverages data and analytics to translate into industry insights and recommendations, ultimately to support our clients during economic uncertainty while uncovering growth opportunities in consumer credit risk. I am pleased to welcome back our panel of experts in the risk advisors group, Jesse Hardin, Tom O'Neill, Dave Sojka, and Maria Urtubey. Welcome all. So I guess as we get started here, does anyone have any fun trips for the summer? Yeah, I think I just really excited about this Atlanta trip. I may or may not have already taken it and I may or may not already be here, but Atlanta seems great this time of year. I may be going to the one place hotter than Atlanta and I'm going to New Orleans in a couple of weeks. So looking forward to that. Sounds very jazzy, amongst other things. Yeah, I just got back from a wonderful vacation with my children at Tybee Island. It was a nice time. It's outside of. It's kind of an island off of the Georgia coast by Savannah. I had to look it up, Tom, but now I know where it is. It's quite fun. You can go on haunted ghost tours of Savannah and things like that. It's quite, quite enjoyable. Yeah, we decided this year we were going to take a fall vacation. So we're going to see how they. I've always wanted to do that. I figured to miss the lines and the, and the heat. And I'm going to Disneyland with my kids and my nephew that is visiting, so should be fun. Awesome. Cool. Thanks. Thanks everybody. So in today's market pulse, we will hear some prior excerpts from economic experts. Doctor, uh, Amy Cruise cuts, Doctor Rob Westcott and doctor Mark Zandi. And the risk advisors will be able to provide some commentary on the interpretation of the various findings that they've been able to share with us. So, Tom O'Neill, we've talked about the k shaped recovery and yeah, I guess as we're, you know, considering that there was a clip from, you know, Mark Zandi in our last market pulse where he went into some of these considerations. Can you, can you weigh in on that a little bit? Yeah, I'd love to. And actually it was more than Doctor Zandi himself, but also the other economists also had some points to make. So maybe we'll play a clip for that before digging in. I think it's useful. I'm trying to understand what's going on with the consumer and affordability to really think about the thirds of the income distribution. If you're in the top third of the distribution. I don't think this is hyperbole. I think you're in as good a financial shape as you've ever been. I mean, literally, wealth has risen. No debt. If you have any debt, it's a 30 year fixed rate mortgage locked in at 3.5%. You got a job, your wages are rising, you got plenty of cash sitting in the bank account. Of course, I'm generalizing, but that top third is in a very good spot. Middle third, okay, kind of typical. I wouldn't characterize it as being overly good or bad, is what we would expect to see in a typical time. Bottom third a problem. The bottom third is struggling, and that's where the affordability issues are really paramount. As the economists during our last market pulse were referencing the k shaped economy. The k shape is a very useful tool and something that's been helpful over the last few years to really describe the people who have been flourishing over different economic periods and those that have been struggling. But what we've been finding is that that's really not enough anymore. When we look across different wealth tiers and different income tiers and things like that, we see that different populations are impacted differently by these different events. So even on a surface level, we may see something like wealth increasing over the last few years and say, well, things are going really well. Populations have more wealth at their disposal. But when we dig in a little bit deeper, we see that that's really not the case. And so that k shaped economy, while it's been useful, it's really not describing the full picture anymore. Hey, Tom, you and I, obviously, we have a joint responsibility with our credit union folks. And the talk over the last year or so has been around deposits and really kind of as the, you know, as the consumer, as the average american, manages their money. And, you know, the upper part of that K branch still has money deposited at those financial institutions, inclusive of credit unions. But then there are those that are, that have kind of run, run through that. So, you know, do you think that's a concern as well on financial institutions? Yeah, absolutely. So something interesting that we've seen, looking at what the financial institutions may be focused on, they may be seeing what's in someone's savings accounts, their deposits, and in a lot of cases, they're seeing those amounts grow over the last few years. And so at the surface level, you may be thinking, this is a good thing, right? Someone has more wealth to draw upon than they had three years ago. But again, it's important to put that into context. When we account for inflation and we see what those dollars are worth today as opposed to what they were back in 2020, we see that it's a very different picture, that while I may have more aggregate in my account, that money isn't worth the same amount that it was three, four years ago because of the impact of inflation, I'm actually less able to meet those financial emergencies or the day to day realities of my financial life than I was maybe three or four years ago, even though on paper it looks like my wealth has increased. Sorry. We were discussing that rule of thumb cushion for emergency funds, the six month savings ideal of monthly expenses. And even for some households, getting just to three months is a luxury, an indicator. Yeah. Or maybe theyve still been going with the six months, but those six months now will only cover three months. What used to cover six months three years ago isnt meeting the same thresholds today. Yeah. And I guess when you think of the breadth of inflation as well and just the notion that so many different goods and services have increased in price, I can see, Tom, to your comments about the, across all the income bands, you think the higher income bands, theyre dealing with inflation certainly differently than those that have less income. And it seems like even though lower incomes are outpacing potentially inflation, those stressors are still there when its so pervasive and everything that you have to buy to live nowadays. Yeah, thats an interesting point, too, Jesse. And we heard the economists talk about that during the last market pulse in saying that, maybe surprisingly, the income tier thats had the most appreciation in terms of their annual income are those bottom tiers. Hourly workers and service sector employees have actually grown in terms of their incomes over the last few years. And so youre thinking, well, thats great. They must be in a better position to, to make ends meet on a month to month basis. But to your point, thats also the sector thats most impacted that are seeing the biggest portion of their incomes going to those daily needs things, the things that have been most impacted by inflation. Again, its putting all of that into context and realizing that while it is true that wealth has grown, that income has grown, that doesnt mean that people are happy about their financial situation. Yeah, I find a lot of that quite interesting. Specifically, we talked about a number of things, income, wealth, credit, even the k shape is essentially what im hearing is a flattening of the distribution across all those things. And then tying that nuance together is really the way to manage through that, with respect to understanding, how can we understand where income is comparatively with respect to inflation, how does the wealth picture tie in and then ultimately credit, and then thinking about that through the underwriting process, with things like debt to income payments income, and do they have the disposable income to be able to cover their debts appropriately? So let's go ahead and pivot. Maria. With inflation coming down substantially, we're hearing about the disconnect with consumer sentiment and the k shaped recovery, and it's likely even that, given where things are sitting. I'm hearing some chatter about some potential interest rate reduction, but I'm not quite sure where we might be sitting with that. But maybe you can comment on that. It really comes down to a disconnect between the concept of falling inflation, which is prices are still going up, but at a slower rate and the level of prices. So eggs are up 49% versus where they were two or three years ago. Gas prices are up. These high frequency things that we look at, if you just got your car insurance bill like I did, that's up about 50%. So a lot of these things that we're paying for are at much higher prices. And even if we've been lucky enough to have incomes that keep up with it, it still seems to hit us emotionally, even if we're maybe holding up financially. Yeah. The June number was released last week, and it was at 3%. May was at 3.3. We were at 3.4 in April. We've been in the three since June of last year. We're getting close to the Fed target of two. But while income growth has outpaced inflation, it's not the case for everyone. We're going back to the k shape economy. We just heard from AV on the rise of eggs, let alone auto insurance. We have heard from some of our market positives whose incomes have not kept up with inflation. And while car prices have dropped, if you need to buy a new car at an average of 48 to 50,000, it's nothing considered affordable but necessary. And we have even heard from older, stable, near retirees households, for example, postponing the retirement plans as a result of the how they're impacted by inflation. We also hear, and we read about some consumers even becoming more price conscious. Dave, you shared even people are limiting spending on areas such as chips, right? So these nuances of minute, you know, grocery shopping, everyday items are under surveillance and being looked into. Hey, Maria, I've got a question for you. Given that you're our resident argentinian, do you just laugh at the notion that we're worried about two to 3% in a way. But it makes sense, again, how that in a way triggers these more conscious and more in a way, again, decisions on what is luxury versus what is an expense that you need to afford. Yeah. And it sounds like the good news is that the recent comments from Chairman Powell seemed to indicate maybe more of a focus on 2% or somewhere north of 2% than that hardened fat number of hitting 2%. Yeah. It is encouraging Jesse to hear the comments coming out saying, look, we're not going to assume that there's a magic target that we have to meet. And if we don't, then we stay the course that it's going to be a matter of looking across the entire landscape and across all of the data and say, okay, when is the right time? How many times should we do this? And also related to that understanding that there's less of an aversion, it seems like to the political schedule as typically we would hear, and that there's comments being made saying, look, we're going to do this when the time is right and we won't let other factors weigh in on that. So it seems like while we're not there, there's definitely a lot of nice movement in the direction that we want to be going, you know, for this with back to school coming up, it's kind of interesting to, you know, I've been looking at the things that I have to get for my kids this year and the prices for school supplies increased, I think, by about 24%. And, you know, it's quite interesting. I think it's, you know, with, you know, within the framework of inflation increasing to the levels that it has. There's a lot of things like that as we, as we move through the, through the year from a seasonality perspective on, on some of those impacts. And specifically even like, if we look at educators, a lot of them are having to buy a lot of their own school supplies or find ways to that. A lot of my, you know, just various people I know, friends are starting to advertise on like social media that can you, can you help buy these supplies for us and things? So it's quite interesting to see some of those impacts that, you know, that have been occurring. Well, frankly, Tom, as the spouse of a teacher, that's nothing new. Yeah, I was going to say same here tomorrow. Same. Just maybe, maybe it's how many things are in the list that you asked for. Maybe that's what's changed. Yeah, we didn't do that when I was a kid, you just had to walk 5 miles both ways in the snow. Yeah. Fairfax. Yeah. So. All right, Dave, we've seen some categories of delinquency at or near peaks and that we saw during the great recession and the start of the pandemic, and some of those are on the rise or moving down. Can you start the discussion around that? Yeah. Thanks, Tom. So obviously, we've been talking about delinquencies for several months. It's been in the news. And then I think we've got a quote from Mark Zandi, and I think it's around whether he thinks delinquencies have reached their peak. So let's listen to that. I do think delinquency rates on consumer credit are peaking in addition to the solid job market and expectations for, for, excuse me, for interest rates to come down. That should be enough to allow delinquency rates to moderate here as we move forward, I think there's a story to be told in terms of how we got here and where we need to go. So obviously, during the lockdowns, consumers weren't spending and we had supply shortages. Adding to the reduction in spend, a lenders realized people weren't working, there were layoffs and so on. So again, and there wasn't really a desire to grant new credit, and so there was a pullback in terms of lending. Once stimulus funds were issued, consumers started to spend again. Eventually, for some, that stimulus dried up and they needed new credit. Lenders seeking an opportunity resumed lending to take advantage of a fruitful credit seeking market, and that started the problem. While delinquencies have run up over the last nine months or so, there's been a recent improvement. We've seen bank card, private label and auto delinquencies rise above 2011 levels. But first, mortgage and personal loans saw delinquencies that rose but remain well below those of the previous peak. We've been discussing for several months now that the 2022 and 2023 vintages are performing worse than earlier vintages and are likely caused by a loosening of credit standards and some score inflation. Steven? Yeah. One of the things I was thinking about as well, when we think of what Maria was saying in terms of hitting maybe the 2% inflation target and seeing rate reductions, when we think about the types of loan products that were most impacted with increasing rates, you think of the, certainly credit cards, you think of personal loans, some of those products that had variable rates. I do wonder as we start to see a reduction in potentially the Fed funds rate thats going to translate into the rates that overall loan holders are paying. I wonder if that would have a potential impact, maybe in delinquency as we start to see a decrease in the interest portion of the payment that, that Lindy would make. Any thoughts on that? Yeah, thanks. Obviously, that's the hope, is that as rates come down, and obviously the direct correlation to that rate is the minimum payment requirement, specifically on a credit card revolving debt, obviously from the auto, from the mortgage side, those are fixed, but that might encourage, as those rates come down, the entrance into the market. For the people that have been on the sidelines that have been priced out, there's some impetus there. So I think having rate reduction will help. Unfortunately, we all know as prices go up very fast, they don't like to come back down very quickly. And so we'll see how soon lenders react to reducing the interest rates on the revolving products, on the fixed products, once the fed starts cutting. And we have seen overall, Dave, when we were discussing delinquency, even at that sub, at the subprime level, over at least the last five to six months, there has been some flattening. So even though some asset classes have exhibited higher than ideal delinquency levels, they seem to be more under control. Lenders have responded, adjusting their underwriting procedures. Right. And a question on that, Maria, and maybe this is to the whole group, but as we see some signs of softening in the delinquencies and some positive movements there, do we feel that that's seasonally impacted or do we think that it's more than just what we would naturally tend to see this time of year? Yeah. So what we've seen is that year over, you know, every, every, we'll say January through May, if you will. There's a, that period, that five month period, within that month, sometimes it's three months, sometimes it's two, sometimes it's four. There's a reduction, a cyclical reduction, seasonal reduction, right around tax season, consumers are taking their tax returns and are paying down their debt. So we see delinquencies fall. I think it bears in mind, kind of comparing what that rate of decrease in 2024 has been versus others. It's a little bit less than what we've seen in years past, in years past, going all the way back to, say, 2013, 2014. But I think it's on the right track. I just wanted to, before we leave the delinquency point, I wanted to go back to Maria's point on subprime, and that's really where we've seen lenders react to the rising delinquency. They've cut back on the subprime lending. And that's really where a lot of the delinquency has been. You see that across the various outlets talking about subprime delinquency is a real cause of concern, and lenders have reacted by restricting the volume associated with that. So kind of tying up to Mark's comment about whether it's peaked or not, I think I'd offer cautious optimism. Unemployment is lower, inflation is slowing. But obviously, Tom, as you pointed out, with the k shape out there, some Americans are doing great and their credit reflects that. And unfortunately, on the lower side of the decay, that group bears more closely monitoring. I think as we're watching the delinquency levels, it's critically important for us to see how payment hierarchy pans out. And specifically when there's often like, as credit card utilization rises, what the delinquencies are oftentimes a fast follow for anyone who's on the cusp of not being able to pay their credit card. And then once that starts happening, then they'll have less available credit based income for them to be able to cover various debts as we think about inflation. So watching and observing, especially with student loans coming back into repayment in a few months, to see what is the peripheral impact of student loans as it carries through into credit card, as that carries through into the other asset classes like auto mortgage, etcetera. So let's pivot with one more question here and talk about spending. So, Jesse, we've seen retail spending continue to stimulate this economy with some of the recent data trends. Do we see this continuing? Yeah. Thanks, Tom. It's almost like we planned it today, but we had a new release of the Census bureaus advanced estimate of retail sales. And on the month there was no growth. So it was actually 0%. We saw an increase from last month, a revision to the number of 0.3% month over month. So year over year were still seeing growth in retail spending. Thats certainly a good sign. I think its really important to go back and look at what we talked about last year. And the health of the economy was really propped up by a couple of things, really the american consumer and the way that they were spending. And then also that Americans were employed. And we saw that as Americans continue to be employed, then they continue to spend on goods and services. And so certainly we look to the labor markets to kind of see if there are any warning signs there. Labor markets, I think, have been reaching a normalization more than theyve really been pulling back. And thats a good thing. That certainly decreased some of the stress on the Fed in terms of how they had to manage the, the economy. But I think were also seeing that consumers are really starting to be more choosy about where and how theyre spending their money. And so I think many have decided really to not buy in certain segments or they choose different choices to mitigate some of the costs that theyve seen. And I think producers are really starting to take notice of that. And so we see some producers have talked about lowering prices, which is obviously a good sign. Amy, I think, said it best in the clip. Lets take a listen to this clip here. Prices are not falling and we shouldn't expect them to fall. The best we can hope for is that the prices kind of steady out. And we get back to the Fed's target inflation rate of about 2%. So I think we have to remember, really that prices ran up very quickly. They increase very quickly into 2021 and 2022. And so it's going to take time for those prices to come back down. Remember, when we talk about inflation, we're really just talking about the growth of prices. Were not talking about the deceleration of prices. And so I think we're going to continue in the long run to see that Americans, they're doing quite well and they're going to continue to spend. But I think in the short term, I think we will see these prioritization and even pushback of where consumers are looking to spend their money as they feel the prices have just gone out of whack. Yeah. Jesse, I think one of the biggest indicators of that would be vehicles. I think we've seen the average vehicle on the road is twelve years. And so many Americans are keeping their vehicles longer rather than looking to purchase that new car. So going back to some of the origination fioms I was talking about, and so, again, how much money can I afford for repairs versus trade in and get a new car? Oh, but it's, you know, it's a 9.510 percent interest rate. My payment's going to be upwards of $750. And so how do I do the math there to decide where do I spend my dollars? Yeah, I was just going to say. That's a good point, Dave. I think it was a point that Rob brought up in terms of the consumer looking at new vehicle prices, and those are falling to some extent, lots of rebates that dealers are offering. And so hopefully, the notion that Maria talked about when we talked about the interest rates potentially falling as a result of the fed movement, fed potential movement. Hopefully, we'll see that trickle down to auto prices as well. Thank you to my friends Dave, Jesse, Maria and Tom for joining me today. To our listeners, I hope you enjoyed today's topic. If you have questions, suggestions for future podcasts, please reach out to us at riskadvisors@equifax.com. dot we look forward to hearing from.