Americans will soon face a double whammy: high inflation combined with pricier loans and credit card debt.
Americans are likely to find themselves paying more for loans and credit this year, with the Federal Reserve signaling on Wednesday that it plans to start from its current level of close to zero. That shift is a response to the highest inflation in four decades, with prices — a trend that economists think is likely to continue for months. Tightening monetary policy raises the costs of borrowing for consumers and businesses, weakening demand and curbing prices. But it could also pinch people’s budgets as the Fed continues to normalize policy over the rest of 2022. Wall Street analysts expect the central bank to lift rates three or four times this year, with each increase boosting the benchmark federal funds rate by 0.25%, or even 0.5% if inflation persists and the Fed decides to slam on the brakes. For consumers, that likely means higher credit card rates and more expensive loans. “What the Fed is realizing is that by having so much cheap money available, it is really causing a lot of consumers to say, ‘Oh, I couldn’t afford that before but now I can,'” said Kent Lugrand, president and CEO of InTouch Credit Union. Every 0.25% increase equates to an extra $25 a year in interest for $10,000 in debt. So if the Fed boosts rates by a total of 1% over four hikes this year, consumers will pay $100 extra annually on that debt. “Depending on the amount of your debt, that can add up quickly,” Lugrand said. That double barrel of high inflation and pricier debt could be painful for some consumers, noted Colleen McCreary, consumer financial advocate at Credit Karma. The personal finance firm found that more than half of Americans are now in worse financial shape than before the pandemic. Among households earning less than $50,000 a year,6 in 10 are in a more precarious position, the study found. “We’re still very much living in this tale of two cities,” McCreary said.
