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The Interaction of Household Earnings, Credit and Price Inflation

CAMS Weekly View from the Corner - Week ending 12/8/23

December 11, 2023

This past week we had updated information released across economic reports that when pieced together allows us to share a tale of the everyday household in recent years up to current day.  To be fair said tale will be relatively succinct compared to the broad scope of what it could be in light of the objective of these editions to be reasonable in length.  


From last week’s releases we pick up the story with household credit released on Thursday. 


Again in the name of brevity we will only focus on revolving credit – credit cards – being they are readily available for use and have been a well recognized “tool” for everyday households to lean into in aiding them to navigate this multi-decade historical price inflation era.


The updated data tells us credit card debt increased by $2.9 billion from the previous month’s release. 


This is one of the lower month-over-month increases in 2023.  Compared to one year ago said debt increased by $110 billion – a massive amount when placed into historical context – hold this thought.  The overall debt level of this category now stands at $1.3 Trillion rounded – an all time high level.


As a data point throw-in if you will, per the banking system data the typical interest rate assigned to this debt if not paid within the 30 day grace is 23%.  This is up from the “bargain rate” of the mid-teens through most of this 21st century.  (Perhaps the 23% typical interest rate is beginning to dissuade usage along with maxed out or near-max lines of credit when noting one of the lowest increases in 2023 for the most recent month.) 




This past Friday the monthly employment report was updated from the Bureau of Labor Statistics (BLS) posting an additional 199,000 new jobs created.  Our focus within the employment report for today’s edition is the average hourly earnings.


We have delved into numerous aspects of the employment report within these editions in recent years with the average hourly earnings measure being one of our central points to monitor during this price inflation era.


In this updated release we see Average Hourly Earnings of All Employees: Total Private increased 4% compared to a year ago. 


For perspective the high mark in the growth rate of these hourly earnings during this price inflation era was 5.9%.  As an aside, we mark the launch point of this described price inflation era as early spring of 2021.  This is when we rocketed north of the Fed’s 2% target and continued higher from there.


The Fed via Chairman Powell’s messaging has included hourly earnings/wage growth rates as an important measure for them as they have been concerned if these wages were to continue to increase at an ever higher growth rate then what is known as “wage-push” price inflation could occur further entrenching price inflation within society.  


Through the eyes of the Fed the 5.9% down to the current 4% is progress.  Sadly, through the eyes of the everyday household it is barely a change at all when viewed through a lens of navigating their household finances through this price inflation environment.  Let’s get perspective below.

The above takes us back to the Great Recession of over a decade ago for recent perspective on Average Hourly Earnings: Total Private when adjusted for price inflation.


The key for a truly vibrant economic backdrop is when wages are growing notably north of the price inflation rate.  Without this said society, through the lens of the economic backdrop, is treading water at best.  With this the results that the above chart reflects is unimpressive overall. 


Wages when adjusted for price inflation has been just north of or just south of the breakeven line (solid horizontal line across the chart) throughout the timeframe depicted.  Flat to 1% positive or negative has been the storyline.  That is until our aforementioned launch point of this price inflation era as highlighted with our red box.


Since the early spring season of 2021 – 2 ½ years ago – hourly wages when adjusted for price inflation have been solidly negative the vast majority of the time.  As offered earlier that while the Fed may be pleased with the downtrend to the current 4% wage growth rate in the eyes of the everyday household little has changed with their wages relative to price inflation.


Bringing it All Together

In the above view we bring the interaction of household earnings with revolving debt and price inflation.  This also dates back to the Great Recession of just over a decade ago.


Two lines interacting makes this view look confusing if not intimidating.  We are merely showing credit card debt along with the Average Hourly Earnings adjusted for price inflation from our first chart.


In this storyline we can see a radical change took place where our red box and red arrow begin when viewed through the fullness of the chart.  As our red box again denotes how wages went hard negative when adjusted for price inflation we saw a simultaneous launch point (red arrow) of credit card debt.


So as the rate of growth of price inflation has declined so too has wage growth rates which has left households in the same box (if you will) as they have been in all the way through this era. 


Our small red circles note the previous trough and high point of credit card debt which outlines nearly a decade of time.  In that total timeframe credit card debt grew by $260 billion. 


As shared at the top of this edition just in the previous 12 months we have seen credit card debt increase by $110 billion.  Even worse, in the comparatively short time of the previous 2 ½ years of this price inflation/negative wage growth rate era credit card debt has increased by $325 billion!


Whereas it took a decade in the above chart to see the citizenry increase this debt category by $260 billion (red circles) we have far eclipsed that level of growth (red arrow) in just 2 ½ years.


While collective market participants are clamoring for a rate cut to get the party started again if you will everyday households remain underwater or are just trying to surface from being under water in this price inflation era relative to their take home wages. 


Credit cards have been a go-to “relief” valve but at 23% interest coupled with trying to service the large additional debt burden we know said valve offers no real relief or solution.


If the Fed cuts rates (as is now priced into markets current day) before this price inflation era is brought to a close they will be inviting a real knock down blow to the everyday household if they haven’t already done so. 


Regardless, as it stands now via interest rate traders, the expectation is for a ¼% point cut in March of 2024.  Without a recession between here and there it seems very unlikely price inflation measures across the board (not just one selected measure) will be sub-2% thereby meeting the Fed’s 2% target level. 


2024 is certainly about to get real interesting on many socioeconomic fronts.  Be careful if you are convinced of X outcome be it in markets, price inflation or the economy itself. 

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


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