The cost of living continues to weigh on American consumers. While eggs are no longer the focus of food price pains, other household staples like coffee, beef, and candy have seen double-digit price increases over the past year. Grocery prices rose at the fastest pace in 3 years in December, and when combined with rising costs of other essentials, it’s concerning but not entirely surprising that consumers have turned to crowdfunding to cover basic needs.
According to Bank of America economists, “The ‘K’ is here to stay”, referring to the duality seen between financial stability and spending of higher- and lower-income households. The top 5% of consumers drove the bulk of overall spending gains through late 2025, while lower-earners cut back on nonessential purchases amidst financial pressures. For those on the middle to lower end of the income spectrum, an unfavorable economic climate will put more strain on finances, leading to increased delinquency and the need for alternative sources of credit to make ends meet.
With new and persisting economic challenges and no indication of reprieve in sight, the year ahead coming out of 2025 looks challenging for consumers, especially those on the middle- to lower-end of the income spectrum. We’ve distilled the factors of the economic landscape and crafted recommendations to help borrowers, lenders, and collectors prepare accordingly.
Key Economic Indicators
The economic data from Q4 shows the financial hurdles facing many households. While the economy as a whole continues to move forward and looks strong on paper, the benefits are not being shared equally, and the real picture is complex below the surface, creating significant headwinds for a large portion of the population.
The job market has cooled significantly since earlier in the year, with employers adding only 50,000 jobs in December, and the unemployment rate settled at 4.4%. Long-term unemployment rose by nearly 400,000 people over the course of 2025.
Inflation still remains a primary concern. December data showed a 0.3% monthly increase in the CPI, with the annual rate holding at 2.7%. Essential costs continue to climb, especially shelter (up 3.2% annually) and food (up 2.4% annually).
In response to the cooling labor market, the Federal Open Market Committee lowered interest rates by 0.25% at its December meeting, landing at a target range of 3.50%–3.75%. This marked the third consecutive cut of the year, but expectations for multiple rate cuts, if any, in 2026 have dropped.
Household balance sheets are showing significant stress, with delinquency expectations having deteriorated to their highest levels since the pandemic. Notably, auto delinquencies reached 3.88% late in the year, the highest level in 15 years, and that’s not counting closed, charged off accounts. Foreclosure filings in December 2025 were up by 26% over November, having surged by 57% compared to the previous year.
Credit card delinquency gradually rose through the second half of 2025, both in terms of account volume and dollar balances, with 30-plus-day delinquency rates running higher than pre-pandemic levels. News early in 2026 about caps to interest rates has banks on edge, with potential implications for credit access at a time when consumers may need it most.
What’s Impacting Consumer Finances?
While higher earners are still faring well, lower-income Americans are struggling with wage stagnation that has not kept pace with the costs of living. Several specific factors are squeezing household budgets and making it harder for consumers to manage their financial obligations.
Grocery prices rose by 0.7% in December, the largest monthly gain since the peak inflation period in August 2022, and were up 2.4% over the previous year. Restaurants similarly felt this squeeze, and passed increases on to consumers, with costs for dining out rising by a similar amount, marking the largest monthly gain in three years.
Utility prices are similarly starting to strain budgets, with electricity prices up almost 7% last year and natural gas reporting double-digit increases. This cost is expected to continue rising as data centers that provide the computing capacity and storage needed to power AI models add to power demands. Electricity costs near significant data center activity have increased as much as 267% per month, and as more data centers are constructed, more Americans should expect equivalent cost increases.
The federal student loan landscape is undergoing a major shift with big implications. The SAVE plan was shut down in late 2025 following a legal settlement, forcing millions of borrowers to transition to alternative, often more expensive, repayment plans. A combined 12 million borrowers are in various stages of delinquency, default or forbearance with uncertain offramps, and the Education Department announced plans to resume wage garnishment in early 2026.
Health care costs are also going to be a big factor in budgets this year. Industry experts expect the premiums for employer-sponsored insurance have increased faster than overall inflation in 2025 and will likely do so again in 2026. Policies available on Affordable Care Act (ACA) exchanges are rising while tax subsidies for ACA coverage are expiring, which will raise rates for the 24 million people currently covered by ACA policies. For Medicaid recipients, new eligibility requirements under the One Big Beautiful Bill Act will also raise health care costs or reduce availability altogether.
What’s Impacting the Debt Collection Industry?
The debt collection industry is adapting to a regulatory environment that is becoming more localized and a technological landscape that demands greater attention to security.
The future of the CFPB is in flux as funding disputes continue. As of the time of this publication, Acting Director Russell Vought has asked the Federal Reserve for $145 million to fund the agency from January through March. He had previously moved to dissolve the CFPB, instructing staff to cease work and halting the agency’s funding. In the meantime, the agency is aggressively pursuing a deregulatory agenda.
As federal oversight wavers, states are stepping in. At least 14 states proposed legislation in 2025 to regulate financial products, with many laws taking effect late in 2025 or on January 1, 2026. For a quick summary of the key developments from 2025, take a look at this overview from TrueML’s legal team.
The push toward AI in financial services continues, but the PwC 2026 Global Digital Trust Insights report highlights that 47% of leaders cite a lack of qualified personnel as a top challenge. An undisputed point is that implementing AI must be paired with robust data protection to maintain “digital trust”, which is a concern for regulators, businesses, and consumers alike.
How Are Consumers Feeling About Their Financial Outlook?
Consumer sentiment reflects the deep anxieties revealed in the economic data. The Conference Board’s Consumer Confidence Index declined to 89.1 in December, with consumers’ assessment of their family financial situations turning negative for the first time in four years.
The University of Michigan Consumer Sentiment Index showed a slight rebound to 54.0 in early January, but this remains nearly 25% lower than the previous year. Furthermore, 47% of Americans believe they would not be able to find a good job in the current market.
The Federal Reserve Bank of New York’s December 2025 Survey of Consumer Expectations agreed, with job finding expectations declining to a series low and job loss expectations also worsening. While spending and household income growth expectations remained mostly unchanged, delinquency expectations deteriorated to the highest level since the onset of the pandemic, and inflation expectations increased at the short-term outlook.
What Does This Mean for Debt Collection?
For businesses with financially stressed customers, navigating this challenging environment requires a strategy centered on empathy, awareness, and trust. Leveraging AI to do this at scale offers a path to success, but will require cautious, data-driven strategies and strengthened governance to navigate evolving risks and opportunities. Here are a few things to consider:
- Consumer expectations have evolved, your strategy must adapt. Empathy, convenience, and a customized experience will go a long way in building goodwill with consumers in debt. If you’re still relying on calling alone to drive repayments, your collection results will likely show the impact of being behind-the-times this year.
- AI is everywhere, but how you use it is key. Whether you’re using LLMs to write emails, chatbots to field consumer inquiries, or deeper, systemic AI, you’re going to need to keep an eye on evolving regulations, auditability, and data security concerns. For example, are you prepared for consumers using agentic AI for debt collection negotiations?
- And keep the other eye on the rapidly evolving regulatory landscape. What happens next with the CFPB will have big impacts on businesses and consumers. But either way, states and the FTC are stepping in with their own priorities for both financial services and AI regulation. Strategies will need to be informed and agile to keep up.
Sources:
- Associated Press – Crowdfunding basic needs
- U.S. Bureau of Labor Statistics – December jobs
- U.S. Bureau of Labor Statistics – December inflation
- TheStreet.com – FOMC lowers rates
- Bankrate – Auto delinquencies
- HousingWire.com – Foreclosure rates
- Experian – 2026 State of Credit Cards
- American Bankers Association – Credit card rate cap
- Axios.com – Grocery prices
- Bloomberg – AI data centers & electricity
- NPR – SAVE plan ending
- Center for Economic and Policy Research – Health insurance premiums
- Pymnts.com – CFPB funding
- PwC – Global Digital Trust Insights Report
- The Conference Board – Consumer Confidence Index
- University of Michigan – Consumer Sentiment Index
- Federal Reserve Bank of New York – Survey of Consumer Expectations