Savings Rate Falls, Consumer Debt Surges as Inflation Weighs on Household Finances

Alain Filiz shows off some of his credit cards as he pays for items at Lorenzo's Italian Market in Miami, Fla. on May 20, 2009. (Joe Raedle/Getty Images)

With rampant price inflation eating away at household budgets, U.S. consumers are saving less, using debt to keep their heads above water, and losing confidence in the economy.

In April, the household savings rate tumbled to 4.4 percent, down from 6.2 percent in March, according to the Bureau of Economic Analysis (BEA). This is the lowest it has been since the 2008–2009 Great Recession. In the early days of the public health crisis, the U.S. household savings rate was just under 35 percent.

Consumer credit advanced by $38.07 billion in April, topping the market estimate of $35 billion, the Federal Reserve’s monthly credit report highlighted. This is down from the $47.34 billion increase in consumer credit in March.

The U.S. central bank noted that revolving credit, which consists of credit card debt, climbed by $17.77 billion. Non-revolving debt, such as auto and student loans, rose by $20.3 billion. Overall, consumer credit increased by 10.1 percent year over year.

In total, revolving credit advanced close to 20 percent in April to $1.103 trillion, topping the pre-pandemic record of $1.1 trillion. This has been driven by credit card balances rising to $841 billion in the first quarter of 2022.

About 33 million Americans think they will have more credit card debt by the end of the year, according to a new survey by WalletHub, a personal finance website.

“[W]e project an increase of at least $100 billion in credit card debt during the year,” said Jill Gonzalez, WalletHub analyst, in a statement. “This shouldn’t be much of a surprise, considering the increased prices consumers are being confronted with and their increased appetite to spend.”

A separate Fed study found that household wealth fell for the first time in two years in the first quarter. During the January-to-March period, households’ net worth tumbled 0.4 percent to $149.3 trillion, driven by a $3 trillion collapse in equities. But the drop in stock valuations on household balance sheets was offset by a $1.6 trillion increase in real estate.

The report noted that household balance sheets stayed strong in the first three months of 2022 as they were approximately $32.5 trillion above pre-crisis levels.

However, interest payments could begin to play a substantial role in families’ personal finances, warns the Brookings Institution. Last year, half of U.S. households with revolving credit card debt paid $111 billion in fees and interest.

With the Federal Reserve on a path of raising interest rates, borrowing costs and debt servicing payments will rise in the coming years. WalletHub projects that the central bank’s upcoming increase to the benchmark Fed funds rate will add an extra $3.2 billion in interest charges next year. This is in addition to the $4.9 billion that the Fed caused through previous policy tightening efforts.

Increasing debt, higher interest rates, and elevated inflation have about one-third of Americans expecting their household financial situations to deteriorate over the next year, the Fed Bank of New York’s Survey of Consumer Expectations discovered. More than half also believe that it will be harder to obtain credit next year.

Consumer sentiment has also collapsed in this economic environment.

The University of Michigan’s Consumer Sentiment Index plunged to 50.2 in June, down from 58.4 in May. Consumer expectations plummeted to 46.8, while current conditions declined to 55.4.

On the inflation front, consumers raised their one- and three-year expectations to 5.4 percent and 3.3 percent, respectively.

“Consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession,” explained Joanne Hsu, the Surveys of Consumers Director.

Households could come under even more financial pressure as the consumer price index (CPI) came in higher than what the market expected in May.

Last month, the U.S. annual inflation rate advanced to 8.6 percent, higher than the market forecast of 8.3 percent, according to the Bureau of Labor Statistics (BLS). This is the highest reading in 41 years.

Soaring inflation is also impacting wage growth.

Despite a red-hot labor market, workers are struggling to enjoy their exceptional wage gains. Average hourly earnings climbed 0.3 percent month-over-month in May to $31.95. However, with inflation running as hot as it is, real wage growth is at least -2 percent.

The essential components of the CPI report are showing zero indicators that prices are slowing down, says Christian Hoffman, the portfolio manager and managing director at Thornburg Investment Management.

“Key drivers of inflation such as food, energy, and housing show no signs of abating and disappointingly used vehicle prices, which had shown some potential softening in recent months, came in with engines revving,” Hoffman wrote in a research note shortly after the May inflation report was published.

In addition to inflationary concerns, fears about the broader economy are also becoming paramount among consumers, according to multiple surveys in recent weeks.

The Conference Board’s (CB) Consumer Confidence Index fell to 106.4 in May, down from 108.6 in April. The Expectations Index, which assesses consumers’ short-term outlook for business, income, and labor market conditions, also eased to 77.5 last month, down from 79.00.

“[W]ith the Expectations Index weakening further, consumers also do not foresee the economy picking up steam in the months ahead,” said Lynn Franco, senior director of economic indicators at The Conference Board, in a statement.

“Meanwhile, purchasing intentions for cars, homes, major appliances, and more all cooled—likely a reflection of rising interest rates and consumers pivoting from big-ticket items to spending on services. Vacation plans have also softened due to rising prices. Indeed, inflation remains top of mind for consumers, with their inflation expectations in May virtually unchanged from April’s elevated levels. Looking ahead, expect surging prices and additional interest rate hikes to pose continued downside risks to consumer spending this year.”

Eighty-one percent of adults think the economy is headed for a recession this year, a CNBC + Acorns Invest in You survey in April revealed.