Credit Card Debt Surges to $1.103T as Inflation Hits 40-Year High
The week ends with two bad news. After a slight inflation dip from 8.5% to 8.3% in April, the latest Consumer Price Index (CPI) for May shows inflation ramping up to 8.6%. This marks the highest inflation spike since December 1981, going against economic projections and the Fed’s attempt to put it down with interest rate hikes.
Failed inflation forecast is followed by skyrocketing credit card debt. According to the Federal Reserve’s monthly credit report, revolving credit spiked by 19.6% at the end of April. At $1.103 trillion, this is higher than the pre-C19 debt of $1.1 trillion.
Moreover, as gas prices increased by 48.7% alongside an 11.9% increase in annualized food prices, total consumer debt rose by 10.1%, to $4.566 trillion in April.
Rising Inflation Wipes Out Pandemic Savings
During the COVID lockdowns that hammered the economy, the US Treasury issued three rounds of Economic Impact Payments, commonly referred to as stimulus checks. The IRS was in charge of checking for their eligibility.
This had a debt dampening effect throughout 2020 and 2021, as people used the checks to pay off their obligations, especially credit card debt which comes with some of the highest interest rates. However, with prices rising for the last half a year, that progress in debt reduction has been wiped out.
In other words, the big dip in revolving debt was quickly followed by a big rise. Meaning, that the Fed’s intervention to prop up the stock market by increasing its balance sheet by $4.6 trillion turned out to be a temporary effect, paid back by out-of-control inflation.
“We got our new record; it took just 11 months for revolving debt to bottom out and then 15 months from there to climb back to a new high,”Ted Rossman, senior industry analyst at CreditCards.com
Russia’s Invasion and its Cost for the West
Although the Ukraine-Russian conflict has been simmering since 2014 in varying degrees of intensity, Russia picked this year to resolve the Maidan coup. The West uniformly responded by financially deplatforming Russia. Unfortunately, sanctions against Russia seemed to also be sanctions against the West due to today’s globalized economy.
While Russia is self-sufficient both in terms of food and natural resources, the same is not true of Europe. Self-imposed fallout escalated so far that Poland asked its citizens to forage for firewood last week. Likewise, US Treasury Secretary Janet Yellen recently stated the following to the New York Times:
“Our sanctions against Russia really have an impact on the cost of food and fuel,”The Times’s DealBook D.C. policy forum
Yellen is Powell’s predecessor who had previously dismissed concerns about unprecedented money supply increase. In May 2021, Yellen noted to WSJ that “I don’t anticipate that inflation is going to be a problem, but it is something that we’re watching very carefully.”
Most recently, at the Senate Finance Committee on Tuesday, Yellen did a U-turn:
“I do expect inflation to remain high although I very much hope that it will be coming down now,”
In the meantime, Fed Chair Jerome Powell has made it clear that wages must decrease to combat inflation. That’s not a typo. Despite inflation eating up wages and increasing consumer debt, Powell’s economics see wage suppression as necessary to moderate demand.
“By moderating demand, we could see [job] vacancies come down, and as a result—and they could come down fairly significantly and I think put supply and demand at least closer together than they are, and that that would give us a chance to have lower—to get inflation—to get wages down and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially. So there’s a path to that,”The WSJ press transcript on May 4th.
Powell’s statement seems at odds with Yellen’s later statement that the Ukraine conflict is to blame for soaring prices of food and fuel. Whatever the case may be, inflation is clearly outpacing wage growth. The Bureau of Labor Statistics’ latest report shows a 0.6% decreased real average hourly earnings from April to May.
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What Are the Fed’s Next Likely Moves?
With the inflation rate higher than expected, this justifies the Fed’s hawkish policy to continue. Meaning that more interest rate hikes are incoming. There are five days left until the next FOMC meeting. The target rate probability still remains the same, – 96.43% for 125 – 150 basis points range (1.25 – 1.5%).
As the higher range dropped down (represented as the green area), this indicates that the stock market is pricing in further rate hikes. As a result, the market should not exhibit more volatility than usual. Nonetheless, the negative CPI report still took its toll on both stock and crypto markets.
Given the misleading statements and messy performance of top officials so far, it is safe to say that central planning is likely to yield worse outcomes in the near future before there is an improvement.
Do you think the Fed will be successful in controlling the historic inflation rate? Let us know in the comments below.