Q1 Industry Insights: Persistent Inflation is Bananas and a Tale of Two Consumers

By on April 15th, 2024 in Industry Insights

Way back in January, 2024 was looking strong with decreasing inflation holding the promise of interest rate cuts that would ease the strain on consumer finances and reopen a tight market. Three months into the year, the outlook isn’t looking quite as rosy, but optimism for change persists. While the looming threat of a recession has passed, the outlook seems to point to inflation sticking around and consumer sentiment on the financial outlook this year is mixed. Case in point – even Trader Joe’s gave in and raised the price of bananas, from 19 to 23 cents, for the first time in 20 years, with loyal shoppers calling the move “the end of an era”. The Federal Reserve is still poised for a couple of rate drops this year, though the timing and impact of those are more in question, especially with the resilient labor market that could push interest rate cuts to later in the year to ensure inflation is truly tamed before acting and the global conflicts that are impacting Wall Street and interest rates.

The first quarter of the year coincides with tax season, when many consumers realize a tax refund that helps the strain on finances, which in turn produces an uptick in debt repayment. Strong liquidation rates this quarter don’t necessarily signal how the following months will perform. How has the economy impacted consumers this quarter and what’s in store for the rest of the year? Read on for our take on what’s impacting consumer finances, how consumers are reacting, and what else you should be considering as it relates to debt collection in 2024.

What’s Impacting Consumers?

Inflation persisted in Q1. The Labor Department’s Bureau of Labor Statistics reported that CPI rose 0.4% in March, bringing the 12-month inflation rate to 3.5%, or 0.3% higher than in February. This increase was driven by shelter and energy costs, with energy rising 1.1% after climbing 2.3% in February, while shelter costs increased by 0.4%, up 5.7% from a year ago. The Fed has been expecting shelter-related costs to decelerate through the year, which would allow for interest rate cuts, so this rising indicator is not favorable for consumer economic outlook.

Consumers kicked the year off with debt trending higher. According to the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit, total household debt rose by $212 billion to reach $17.5 trillion in Q4 of 2023 and credit card balances increased by $50 billion to a record $1.13 trillion. Mortgage and auto loan balances also rose, with the Bank saying the data indicates financial distress is on the rise, particularly among younger and lower-income Americans.

The emerging situation is what recent reports have dubbed “a tale of two consumers”. One consumer cohort is the roughly two-thirds of Americans who have done substantially well, own their homes and/or have invested in the stock market – this group had the savings cushion necessary to weather high inflation. The other cohort, made up of mostly middle- and lower-income renters who have not benefited from the wealth effect of higher housing and stock prices, has been hit harder by inflation and is feeling more financial stress.

Experts worry that members of this second cohort are falling behind on their debts and could face further deterioration of their financial health in the year ahead, particularly those who have recently resumed paying off student loans. While approximately 4 million relieved Americans have benefitted from $146 billion in student debt relief as a result of the Biden-Harris Administrations myriad executive actions, millions more are still left trying to add resumed payments back into their budgets amidst a stubbornly high cost of living.

To cover this additional monthly debt, 33% of surveyed consumers with student loans planned to reduce discretionary spending or use their savings; 28% said they would get a second job or do part-time or temporary work; 25% will use money from retirement savings; 21% will use credit card available limits; and 19% will borrow from family or friends, or delay a key milestone like marriage or home purchase. For those who expect student loan forgiveness, 57% surveyed say they would use savings from forgiveness to pay off debt, 10% would put the savings toward a home purchase, 26% say they would put savings toward other savings and 7% say they would spend their savings on other things, according to the Federal Reserve’s latest Survey of Household Economics and Decisionmaking.

A Growing Mountain of Credit Card Debt and Other Indicators

For consumers who turn to credit cards to make ends meet, higher interest rates are making it more costly to carry a balance on a credit card, with the average credit card APR at a record 24.66%. Debt holders are also carrying their debt for longer periods of time, and struggle to pay it off as it compounds. According to a LendingTree analysis of more than 350,000 credit reports, the average unpaid credit card balance was $6,864 in Q4 2023. 

This starts showing up in increased credit card delinquencies, which soared more than 50% by the end of 2023, with about 6.4% of all accounts 90 days past due, up from 4% at the end of 2022. Delinquency transition rates also increased for almost all other debt types, with the exception of student loans. According to Experian’s Ascend Market Insights, overall 30+ days past due delinquency grew, starting the year with a 2.31% increase in delinquent accounts and 10.49% increase in delinquent balances month over month. Q1 of 2024 is also showing a rise in early-stage delinquencies, ticking up from 0.98% in January to 1.04% in February.

Missing payments correlate to another indicator of consumer financial health – the U.S. personal saving rate dipped down to 3.6% in February, compared to 4.1% in January and 4.7% in 2023. The situation remains that a majority of U.S. consumers (59%) live paycheck to paycheck as of February 2024, including 42% of those earning more than $100,000 per year. As an alternative to taking on debt, many Americans are taking on side jobs to increase income instead – as of February 2024, 22% of workers had a side job. The data also shows that 30% of employed consumers earning supplemental income depend on this money to make ends meet, up from 25% last year.

Consumers Worried About Inflation and Debt Accumulation

Unsurprisingly, 82% of consumers surveyed say concerns about inflation top their lists of economic woes, with only 17% holding out any hope that inflation will subside anytime soon. One of the few solutions available to consumers hoping to fight back against inflation is an increase in their paycheck, but the report found that fewer than 4 in 10 consumers anticipated a wage increase this year, down from 43% who expected a raise last year. According to the latest Compensation Best Practices Report, 79% of organizations are planning to give pay increases in 2024—the lowest number in years—in light of a strong labor market and cooling inflation, down from 86% in 2023. And the amount of raises planned for this year are generally smaller, with organizations predicting an average base pay increase of 4.5%, compared to the average of 4.8% given in 2023.

A slim majority of Americans (56%) reported optimism about their household finances in the next 12 months, according to TransUnion’s Consumer Pulse Survey from Q4 2023. Millennials had the highest optimism among generations (71%) while Baby Boomers had the lowest (44%). Millennial optimism likely spurred from reported income increases and expected higher income growth in the next 12 months.

The Conference Board reported a mixed bag of consumer sentiment, with assessments of the present situation improving in March, primarily driven by more positive views of the current employment situation, while expectations for the next six months deteriorated. PYMNTS Intelligence data found that 15% of consumers say debt accumulation was a main pressure point on their savings, having dipped into those accounts to ease their debt burdens. 

What Does This Mean for Debt Collection?

With a mixed and uncertain economic outlook, consumers will be watching their finances closely. While some populations may reap wealth effect benefits and fare well financially, others will face headwinds with sticky high prices and student loan payments. For debt collectors, it will be critical to provide the right experience for each consumer and understand that everyone has a different financial situation with different considerations. While the first quarter may have brought increased liquidation due to cash influxes from tax season, the following months may bring challenges. We’ll soon find out, but as a lender or collector, here are some things to consider:

  1. Personalize your messages. What works for one consumer won’t necessarily work for the next. Consider the customer journey and tailor messaging so it resonates with consumers at different points in the debt collection process. It’s not just what you say, but how and when you say it that will determine how consumers respond. Learn more about the stages of the debt resolution funnel.
  1. Give options. For consumers balancing tight finances, paying a lump sum may not be possible. Payment plans facilitate smaller payments over time that consumers can work into their budgets. Other options like choosing what day to pay and the ability to reschedule a payment will also help consumers stay on track to repayment.
  1. Make it easy. When paying back debt is as simple as click→review→pay online, consumers will be more likely to engage. Using digital channels and giving consumers the pertinent information upfront so they can engage when and how they prefer means cutting out the middleman and empowering consumers to self-serve. 96% of consumers working with TrueAccord resolve their accounts without speaking to a human and often at times outside of standard customer service hours.