Tired Of Talking About Inflation?

There are positives amidst the negative numbers

Insider

Contributing Writer

You may have noticed many more reports about rising credit card debt, credit card delinquencies, inflation, and the risk of an associated recession. Somehow, and for some reason, people fear inflation. “It will erode the wealth of anyone on a fixed income,” people say. “Inflation will drive rates higher and is bad for lenders like mortgage companies.” Really? There are positives, and it is important for lenders to see those as we enter the Spring of 2023.

First, let’s look at debt – near and dear to lenders everywhere. After someone purchases a house, their largest debt is typically the mortgage. Following only housing debt does not paint the full picture. We need to look at similar debts like student loans, car loans, and credit cards, which put together, are now at similar debt levels as 10 years ago. Most lenders consider the complete debt picture of a potential borrower, and it turns out it isn’t just millennials that are leveraging themselves up.

The Federal Reserve calculates total mortgage debt at roughly $11.5 trillion. To put that in perspective, while mortgage debt fell from above nine trillion in 2008 down to roughly eight trillion by mid-2013, it has been on the rise ever since. Growing at a steeper percentage over the last five years than any of the other debt classes, it is back to nearly $9 trillion and rising.

Student loan debt, which tends to garner a huge amount of press, has grown at the most linear clip, tripling to nearly $1.76 trillion since 2006. Student loans are now a larger debt class than credit card debt and auto loan debt combined. Auto loans and credit card debt have followed a similar path over the past 12 years, peaking in 2008, and dipping for a few years, before reaccelerating for at least the last five. Auto loan debt has outpaced credit card debt over that time and is now roughly $1.52 trillion dollars.

That said, individuals, state and local governments, and the Federal government spent 2020 and 2021 refinancing their debt. Families weren’t the only ones obtaining fixed-rate financing at less than 3%. And they are very happy with their low rates. The same can be said for state governments and the United States.

Lenders should keep in mind that a little inflation is good, and too much is bad.

Exact Cause A Mystery

Which brings us to inflation. The commonly accepted measures of inflation are the Consumer Price Index and the Producer Price Index, both produced by the Bureau of Labor Statistics. Both were tame for many years, with some minor fluctuations. And these minor fluctuations are often caused by a particular commodity, such as oil, rather than the broad index. Prices don’t all rise or fall in unison. In fact, no one knows exactly what causes inflation, what effects it has, what is the best measure of it, what a normal rate is, and how to move it up or down.

Inflation hovered around the Fed’s 2.0% target for several years, but in 2021 began to pick up steam and rise to unacceptable levels. This has made the need for stronger wage growth more relevant for workers. Hourly earnings have been increasing to keep up with 6 or 7% inflation levels.

Lenders should keep in mind that a little inflation is good, and too much is bad. For many years it was “adequate.” At the current time it dominates the Federal Reserve’s thinking. Rising rates will slow the economy. That said, it takes time. And the United States has lost millions of workers. As a result, for example, leisure and hospitality, day care, and other sectors remain short workers. And there is excess savings which is pushing up spending. And firms are holding on to their excess workers in case the recession does not come. So, the impact of rising rates is being muted. In the meantime, inflation remains elevated. So, it will take time. But if the Federal Reserve keeps raising rates into a strongly inverted yield curve, many believe that a recession is virtually guaranteed at some point in 2023.