Inflation's wrath has Americans racking up high debt. What at-risk households need to know

Medora Lee
USA TODAY
  • Surging prices are hitting consumers hard.
  • More consumers are turning to debt to stay afloat.
  • Red flags are emerging for some households.

Everyone's running faster to try to keep pace with the hottest inflation in 40 years, but there are millions of Americans who have plain hit the wall. 

In the past year, Americans have watched the prices rise of everything from food and gas to used cars and vacations. They first relied on savings built up during the pandemic to carry them through, but inflation quickly devoured those. And with few signs inflation will ease any time soon, these consumers are increasingly turning to credit cards. 

Although credit cards pay the bills now, consumers may feel pain soon enough. Credit cards notoriously carry some of the highest interest rates, and which also are on the rise as the Federal Reserve embarks on a rate hiking cycle to quell inflation. The average credit card interest rate was 16.17% in the first quarter, sharply higher than the 9.41% on 24-month personal loans, according to Fed data.  

Who’s most affected by surging prices? 

Lower-income earners are getting hit the hardest, especially as gas prices continue climbing to record highs.  

While gas spending on all plastic surged for all income groups to 7.8% in the week ended May 21 from 7.0% in April, lower-income households of less than $50,000 saw their gas spending reach 9.4% of their total card spending, according to Bank of America Institute research. That meant less spending elsewhere, the researchers noted. 

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Last month, 61% of households earning less than $25,000 said they had some or a lot of difficulty covering their usual expenses over the prior seven days, up from 50% a year earlier, according to Equifax and the Census Bureau. Forty-three percent of those earning $25,000 to $49,000 reported similar challenges, up from 38% in the prior year. 

Why are lower-income people most affected? 

Though everyone feels the effects of inflation, not everyone feels them the same way. Lower-income households are more likely to have already been living paycheck to paycheck before inflation began to surge, whereas households with more money have more options to preserve that money’s value by investing in financial markets and earning interest on their assets. 

The hopes that inflation might soon moderate were dashed when the consumer price index for April rose 8.3% compared to last year.

When faced with rising prices, higher-income households also have more opportunities to cut back by shopping sales, using coupons, and swapping to cheaper brands. Lower-income households had already been doing those things, so the next step is usually just to eliminate items. 

What are they doing to cope? 

As prices continue to surge ahead of people’s wages, more consumers are turning to debt to stay afloat. 

In March, total consumer credit leaped by a whopping $52 billion, according to Fed data. Revolving credit, which is mostly credit card balances, rose by $31 billion, or about 3%. Non-revolving credit, which includes student and auto loan balances, increased by $21 billion. 

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Meanwhile, April bank credit-card balances rose 14.2% from a year earlier, auto loans increased 7.5% and other consumer loans climbed 19%, based on an analysis by Moody’s Analytics of data from credit reporting agency Equifax. 

Will this contribute to a recession? 

Although the data appear to be trending the wrong way, a rise in credit balances and delinquencies for lower-income borrowers is unlikely to contribute to a recession, analysts say. The bottom fifth of households by income account for just 9% of total consumption, Ian Shepherdson, chief economist of Pantheon Macroeconomics, said. 

Plus, total household debt is still historically low, even as debt payments have edged up recently to 9.3% of personal disposable income in the fourth quarter, according to the Fed. By comparison, debt payments comprised 9.9% of income in late 2019, just before the pandemic, and 13.2% in 2007, prior to the Great Recession. 

What’s the verdict? 

U.S. consumers are still generally healthy, but red flags are emerging especially for lower-income households if inflation remains elevated.  

“On the one hand, accumulated savings during the pandemic and surging wages from a red-hot labor market provide support to consumer spending,” Bank of America Institute researchers said. “On the other hand, persistent inflationary pressures, including for gas prices, are biting into consumer’s purchasing power. The former seems to be the dominating force for now but an extended period of time of high price levels, or a rapid cooling in the labor market, could tilt the risks to the downside.” 

Where to find help? 

To limit taking on debt, consumers may try to lower their expenses instead. They can visit food pantries, apply for the supplemental nutrition assistance program (SNAP) or look for local agencies to help with rent assistance or other needs. Some states and cities already offer gas tax relief. 

Seniors can apply for Medicare’s Extra Help program, which helps pay your Medicare drug plan’s monthly premium, deductible, and copayments. They can also check out other options like the National Council on Aging’s website to find local benefits programs to help with expenses such as prescription drugs, transportation, and rentals of subsidized housing. Searching the internet using “area agency on aging” with your zip code should also result in a list of local agencies that can connect you to senior services like Meals on Wheels, congregate care agencies for housing, adult home day care programs, or free Medicare and Medicaid counseling. 

Medora Lee is a money, markets, and personal finance reporter at USA Today TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.