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How Inflation Is Changing The Behavior of Low-Income Consumers

low income consumers
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EDITOR'S NOTE: Low-income consumers are starting to change their spending behaviors due to inflation. Why is this a big deal? Because GDP is largely predicated on consumer spending. Less spending means less growth. And higher inflation often leads to less spending. Walmart's earnings took a dive despite its sales figures. Its consumers were spending less on discretionary items and more on staples, like groceries. Credit card debt is also rising; another indication that Americans are feeling inflation’s pinch. All this makes it difficult for the Fed to land the economy slowly by hiking rates. Some analysts have anticipated that it’ll all boil down to this hard choice: either the Fed continues its attempt at a soft landing, allowing inflation to rise higher in the process, or it will have to tighten more aggressively, consequently crashing the market.

Inflation and surging gas prices are changing the behavior of low-income Americans, Matt writes.

Why it matters: U.S. economic growth hinges on consumer spending. So, signs of strain among the less-affluent could complicate the Federal Reserve's efforts to gently slow down the economy with higher rates.

  • "High inflation, especially with respect to gasoline, acts as a regressive tax on consumers, and they are feeling the burden of it," Morgan Stanley analysts wrote in a recent research note.
  • "As such, we are more negative on companies that are levered to low-income consumers."

What's happening: In recent weeks, the impact of inflation — and nosebleed gas prices — have clearly shown themselves to be weighing on Americans, especially those who earn less than the median household income of $68,000. Let's take a look ...

Walmart: Last week America's largest retailer, Walmart, delivered drastically lower-than-expected earnings, despite solid sales numbers, as budget-conscious investors flocked to its stores for less-profitable items like groceries.

  • Executives spotlighted the fact that low-income customers were switching from name-brand lunch meats, deli items and dairy, to generics, as prices surged.

Credit card debt: It's growing at its fastest annual rate in six years, according to first-quarter data recently published by the Federal Reserve Bank of New York, as consumers look to cover rising costs of everyday items like food and gasoline.

  • Rates for those not paying off their monthly balances are rising — generating a windfall for card issuers.

Auto loans: Some are starting to fall behind on monthly payments.

  • The share of subprime auto loans — those with high rates made to people with less-than-stellar credit scores — that were more than 60 days late has increased in each of the last eight months, and now sits at 8.5%, the WSJ reports.
  • "[What] we're watching most closely would be the lower-income consumer in our subprime auto," said Clarke R. Starnes, chief risk officer at Truist Financial, when asked by analysts on a conference call about any credit concerns the bank has.

Yes, but: While these may be signs of increasing financial stress on less affluent Americans, there's little evidence so far that this will turn into a serious problem for the economy.

  • For instance, while delinquencies are rising on subprime auto loans, they're still much lower than they have been historically.

The bottom line: Pandemic-era programs, like the child tax credit, which gave lower-income Americans financial breathing room, are gone. So wages and employment will be even more important.

Go deeper.

Originally published by Axios.

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