Rising Debt, Delinquencies, and a Hot Wholesale Inflation Print Signal More Rate Hikes

According to the latest Quarterly Report on Household Debt and Credit released yesterday by the Federal Reserve Bank of New York, total US household debt increased by $184 billion or 1.1% quarter-over-quarter in Q1 2024 to reach $17.69 trillion.

While mortgage balances also jumped by $190 billion to $12.44 trillion, credit card balances declined in Q1 by $14 billion to reach $1.12 trillion, typical post-holidays. However, 9% of credit card balances became delinquent.

Delinquency rates were the highest among credit card holders who maxed out their credit limit or had a relatively high credit utilization. Elsewhere, auto loan balances jumped $9 billion to reach $1.62 trillion in Q1, continuing the upward trajectory since 2020, where 8% of the balances transitioned into delinquency.

Americans have been battling sticky inflation and high borrowing costs for a while now. As we await US consumer inflation data due today, the wholesale inflation figures for April from the US Bureau of Labor Statistics came in hot yesterday.

The Produce Price Index (PPI) rose 0.5% in April compared to March's 0.1% decline. PPI gauges the price changes that manufacturers pay suppliers and ultimately pass on to the consumers. The data point also offers an outlook on retail-level inflation for future months. As per consensus estimates compiled by Factset, economists expected a monthly gain of 0.3%.

PPI was 2.2% for the 12 months ended in April, marking the highest rate in a year. Although energy costs rising 2% in April lifted goods prices, the overall PPI gains last month were driven mainly by services inflation.

"The concern here is that we now have an upward trend in producer prices, which can only be passed through to consumers and result in upward pressure on consumer price inflation over the coming months," said Kurt Rankin, senior economist at PNC Financial Services Group. He added that interest rates could stay elevated for a prolonged duration, which may derail the US Federal Reserve's plans for rate cuts this year.

Yesterday, US Fed Chair Jerome Powell expressed at the Foreign Bankers Association event that the April PPI data offer more reason to keep rates elevated for longer. He said Q1 had been "notable for its lack of progress on inflation," adding that inflation will likely fall back to lower levels. However, given the unsatisfactory data points year-to-date, his confidence in reaching the central bank's 2% inflation target has taken a hit.

US Fed officials remain concerned that inflation could be more persistent than expected, further complicating the Fed's 2% goal.

"I remain willing to raise the federal funds rate at a future meeting, should the incoming data indicate that progress on inflation has stalled or reversed," Fed Governor Michelle W. Bowman had said in February.

As the consumer outlook on inflation largely influences the rate of price hikes, companies take them very seriously when pricing goods and services. According to the Survey of Consumers from the Federal Reserve Bank of New York's Center for Microeconomic Data, consumers in April expected steeper price hikes and a slump in income growth over the coming year as one-year inflation projections jumped to 3.3% from 3% in March. This deteriorating outlook in April marks the highest since November.

The sustenance of the growing optimism in the US economy and the recent stock gains depend on the highly-awaited consumer price inflation (CPI) data. April CPI index is expected to have climbed 3.4% (annualized), per a Reuters poll of economists.

Miller Tabak chief market strategist Matt Maley noted this week the stock market's rebound after declining from record highs in March renders it susceptible to a chart pattern called the "double top."

That's "one of the most bearish signals we see in technical analysis...If this week's inflation data creates a substantial reversal, it will be a very negative development," he cautioned.