Tuesday, June 24, 2014

Americans are Increasing Debt Just to Buy Essentials

According to the US Federal Reserve, credit card debt currently stands at $854.2 billion, and the average consumer has $15,191 in debt.

Though those figures have declined since the onset of the Great Recession, American consumers are again driving themselves further into debt through the use of their credit cards.

Case in point: There was a whopping 12.3 percent annual increase in revolving credit card balances in April, according to the Federal Reserve.

CardHub projects a $41.9 billion net increase in credit card debt by the end of this year – 8 percent more than last year and 14 percent more than 2012.

The optimistic spin-meisters would have you believe this is a function of higher consumer confidence. But the evidence shows otherwise.

According to Gallup, weekly economic confidence has been flat-lined between minus 13 and minus 15 since the beginning of the year.

That's likely due to the fact that workers are plagued by stagnant wages.

Over the past year, average weekly earnings have risen 2.1 percent — about the same as the 2 percent increase in consumer prices. That has negated the marginal rise in earnings. We'll get back to that rise in consumer prices in a moment.

The median usual weekly earnings of full-time wage and salary workers, adjusted for inflation, has actually declined since the end of the recession, according to government data.

This has caused revolving credit to now become non-discretionary. In essence, Americans are using their credit cards just to afford the basics. It's the only way that many of them can bridge the gap between their stagnant incomes and rising food and gas prices.

Which brings me back to the 2 percent increase in consumer prices noted above. The problem with that figure is that the government doesn't include food and energy prices when calculating inflation.

Consequently, the official inflation rate is quite misleading.

Overall, food costs are more than 2 percent higher than in 2011. However, the consumer price index (CPI) for U.S. beef and veal is up almost 10 percent so far in 2014. Egg prices are also climbing — up 15 percent in April alone — and are expected to rise by 5 to 6 percent this year. And higher milk prices are feeding through to other products in the dairy case, particularly cheese. Additionally, fruits and veggies have jumped more than 3 percent.

"The ongoing drought in California could potentially have large and lasting effects on fruit, dairy and egg prices, and drought conditions in Texas and Oklahoma could drive beef prices up even further," says the U.S. Department of Agriculture.

The spot price of U.S. Foodstuffs — which is not driven by speculation as futures are — is up a whopping 19 percent this year, according to the Commodity Research Bureau index.

The reality is that food price inflation has been higher than overall price inflation for nearly a decade now.

But that's not all.

Gasoline prices have risen more than 10 percent since the beginning of the year, while natural gas and heating oil prices have spiked as well. Higher oil and gas prices ultimately lead to higher food prices.

Consumers are financing their food and energy purchases with credit cards. Of course, this just raises the costs of these purchases in the long run since they add to revolving card balances.

Because consumer spending comprises more than 70 percent of U.S. economic activity, some people will applaud any increase in spending, even if it is debt-based spending for essentials, like food and gas.

However, that's surely not something to celebrate, and it's certainly not the sign of a healthy economy or consumer base.

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