• Rising Inflation


    Rising Inflation Helps Push Household Debt to Record Levels

    Rising Inflation Helps Push Household Debt to Record Levels

    The latest inflation reading released last week was worse than expected. The consumer price index registered a 6.2% year-over-year increase, according to the Bureau of Labor Statistics. This is the fastest rate of price increases in more than 30 years, and an entirely new experience for millennials and those younger.

    So it did not come as a surprise to read the preliminary results of the University of Michigan’s "Survey of Consumers," showing consumer sentiment falling to a 10-year low. The reading was even lower than it was in April 2020, when COVID-19 brought health and economic fears, a shutdown of most activity, 22 million lost jobs and the highest unemployment rate since the 1940s.


    In this survey, consumers named inflation, their expectations that it would continue to rise and a lack of policy proposals to curb price increases as their primary concerns. While inflation is elevated, it can’t be the sole reason for consumers feeling so glum. After all, average weekly earnings were up by 4.6% year over year in October, which means that the real purchasing power derived from earnings fell by “only” 1.6%

    Household Debt Climbs Higher

    Household debt reached a new high of $15.2 trillion in the third quarter, according to the Federal Reserve Bank of New York’s household debt and credit report. Fiscal support since the onset of the pandemic and limited opportunities to spend led to higher levels of household savings and might have allowed many families to pay down debt. Credit card balances have inched higher in the past two quarters but are still $123 billion lower than pre-pandemic levels, a reduction of 13.3%. And households were able to reduce home equity loan balances by almost 19% during that time.

    In the aggregate, however, outstanding debt fell only in the second quarter of 2020 — and by only $30 billion, or 0.2%, from the prior quarter. Since then, consumer debt has been rising, growing by 1.9% in the third quarter of 2021, after a 2.1% bounce in the second quarter, the strongest gains since the fourth quarter of 2013.


    Higher Housing Prices Pump Up Mortgage Debt

    More than two-thirds of household debt in the U.S. is tied to mortgages, and the recent spike in home prices is leading to increased mortgage debt, which grew by 2.2% in the third quarter, a bit slower than the 2.8% gain posted in the second quarter earlier this year. These were the two strongest consecutive gains in mortgage debt since the fourth quarter of 2007, at the height of the housing market boom before the Great Recession. Since pre-pandemic days, mortgage debt has grown by $1.12 trillion, more than the overall growth in household debt.

    Purchasing a fixed-rate mortgage is a long-term hedge against inflation because households can lock in much of their shelter costs for many years. However, new homeowners are typically big spenders on things such as furnishings, new services, renovations or postponed maintenance projects. Furthermore, material and labor shortages have pushed construction costs higher, leaving some new homeowners to foot a larger-than-planned bill.


    Auto loan balances have also been on the rise because of spiking car and truck prices, which jumped by 9.9% in October over the prior year, according to the consumer price index report. Used vehicle prices are now 26.4% higher than a year ago. Consumers in the market for a new or used vehicle have been plagued by low inventories due to supply chain disruptions and the global semiconductor shortage. Auto loan balances rose by 2% in the third quarter and are more than 8% higher than pre-pandemic levels. Notably, the Bureau of Economic Analysis reported that the number of auto sales fell by 20% over the same quarter, reflecting the low inventory levels and much higher prices of vehicles sold.

    What We’re Watching ...

    It might be time to pay attention to COVID cases again, as they have stopped falling, according to the Centers for Disease Control and Prevention. The seven-day moving average of cases across the nation topped 80,000 as of Nov. 14 and has been on a generally upward trend since the last week of October. The combination of cooler weather sending more people indoors, vaccination hesitancy and breakthrough infections is driving cases higher. So far, deaths have been falling, but these usually lag cases by a couple of weeks. The U.K. and countries in Europe have seen deaths rise over the past week, and it is not difficult to imagine the U.S. following that trend.

    With inflation news taking up all the oxygen, news on the factory sector has gone underreported. A number of regional reports in coming days should provide a view into how manufacturers are faring with labor and supply shortages amid strong demand. The Empire Survey for New York state, released on Monday, showed accelerating momentum in manufacturing activity in the region, with both new orders and shipments seeing sizable gains, implying the sector is having success filling orders despite ongoing supply chain challenges. Hiring picked up as well to its fastest pace on record.

    Finally, this might be a good time of the year to track the price of poultry, which according to the Bureau of Labor Statistics, is only 1.7% higher than a year ago. With other food prices higher, this is welcome news for the Thanksgiving feast.

    CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.
    CoStar Economy is compiled by CoStar economists and delivered to your inbox each week. Let us know what else you want to see here and read more news coverage on costar.com
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