This week we interview Oliver Rust from Truflation about his shocking inflation revelation about the US CPI. His data is revealing about the true nature of inflation and what that means for the US economy. The short version is that the CPI is wrong but not in the way you think. Join us for a deep insight into inflation and the future of the US economy

Soaring inflation has slammed the US consumer, with more pain to come 

By Oliver Rust, head of product at independent inflation data aggregator truflation

Over the past two years, inflation has decimated the purchasing power of the US consumer and placed increasing pressure on their financial well-being. From its peak of 9.1% in June 2022, inflation has now come down to 3% one year later, but much of the damage has already been done. Households are hurting from an exponential increase in the cost of living, while 10 consecutive rate hikes are taking their toll on mortgage payers. 

With another potential rate hike on the cards later this month, more pain is likely to come for the beleaguered US consumer. 

Indeed, despite inflation slowing down in recent months, truflation’s inflation calculator shows that the last 12 months have seen the purchasing power of the average US household drop by $128 every month, amounting to more than a $1,500 rise over the past year. Today, the average American household is spending $5,100 on monthly expenses including housing, transportation, and utilities alone. 

The numbers are even more striking if we look back at 2019 before the Covid pandemic began. Since then, the average annual expenses for a US household have increased by a staggering $4,820. While this is based on the average spending and some households may be living a more frugal lifestyle – for example, by spending less on alcohol and tobacco –  this category only makes up around 1.9% of the total truflation US CPI index. 

The biggest weightings in the truflation US CPI index, meanwhile, are housing and food, at 23.2% and 15.3% respectively, which have seen prices rise 3.6% and 2.2% over the past 12 months. 

Soaring debt and spending

As the cost of living crisis in the US continues to spiral out of control, a worrying trend has seen the average American rely more and more on debt to cover soaring expenses. In Q1 2023, consumer debt in the US surpassed $17 trillion, a fresh record according to the Federal Reserve Bank of New York. This marks a $148 billion increase since the last quarter of 2022 and a whopping $2.9 billion rise from the end of 2019. 

Importantly, this data suggests that this increase was not fuelled by new mortgages, meaning consumers are tapping into borrowing to cover other urgent costs. Higher debt levels are dangerous during times of rising interest rates because repayments can go up by hundreds of dollars when the Central Bank hikes rates.

Indeed, despite soaring prices, monthly spending has been on the rise, up from $634 billion in January to $680 billion in April. US consumers appear confident about future finances, with truflation’s data showing a 5% rise in consumer confidence since last month, and an 11% jump versus last year. 

This is reflected in consumers’ spending habits as eating out increased in May compared to the previous month. According to the Fiserv SpendTrend Report, Americans spent 4.2% more in restaurants in May than in April. Spending on food at home has also increased by 0.9%, despite the fact consumers are buying less – a sure sign the average buyer cannot afford as much today as they could a month ago.

Truflation’s own US inflation index, which is calculated using over 12 million data points collected in real-time, reveals that the important “food and beverages” category is one of only two categories to report price increases since last month. At 1.8% versus a month ago, this is the highest monthly increase across all categories.

Consumers face an affordability crisis 

The increase in consumer confidence can be partly attributed to the rise in the average American’s purchasing power over the last few months, as annual inflation falls below wage rises for the first time in two years. Purchasing power simply represents the ability to buy goods and services. Earlier in the month, the Department of Labor reported a marginal drop in the unemployment rate from 3.7% to 3.6%, while wages are now 5.74% higher than last year. With inflation now at 3%, Americans should finally be able to afford their monthly bills without resorting to savings or debt.

Yet the good news is tainted by other reports suggesting that the cracks are beginning to show in the labor market. Business and professional job postings are down 35%, according to the Opportunity Insights Economic Tracker, while layoffs are also on the rise, driven by closures of small and medium-sized enterprises. With interest rates 5% higher than two years ago, it is now much more expensive for smaller businesses to borrow money.

In addition, an affordability crisis may be looming for mortgage borrowers as 30-year fixed-rate mortgages soar past the 7% mark. Currently sitting at 7.31%, this rate would increase even further if the Federal Reserve were to raise interest rates again by another 0.25%. As with other forms of debt, higher mortgage rates can add hundreds of dollars to a borrower’s monthly bill.

Overall, it appears the US consumer is beginning to feel the strain from two years of high inflation and rising interest rates. At the same time, economic growth is ticking along, but it has slowed down significantly in Q1 compared to the final quarter of last year. Given the increasing signs of weakness in the economic data, a hard landing may still be on the table for the US economy. Even if it seems like the hardest times are over, it can take time for the full effect of higher interest rates and inflation to come through. Consumers should prepare for tough times ahead by paying off their credit cards and reducing their debt where possible.