Holiday inflation is hitting consumers hard this season
Inflation remained nearly stable in November as lower gas prices and durable goods largely offset still-strong increases in services.
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The Federal Reserve is expected to keep interest rates steady on Wednesday, suggesting a nearly two-year streak of rate hikes could be coming to an end as inflation cools.
If there is no change, the central bank's short-term interest rate would remain at 5.25% to 5.5% for the third month in a row.
- The Fed's decision will be announced on Wednesday, December 13th at 2:00 p.m. ET.
- Fed Chair Jerome Powell is scheduled to speak at 2:30 p.m. ET following the central bank's final meeting of the year.
- Powell's comments will likely shed light on whether the Fed will begin cutting interest rates in 2024, lowering borrowing costs for consumers and businesses.
The Fed meets on December 12th and 13th and will announce its interest rate decision on Wednesday at 2:00 p.m. ET.
The Fed's series of interest rate hikes, aimed at curbing the highest inflation in four decades, is a key reason credit card interest rates have hit record highs just in time for the holiday season.
Some personal credit cards now charge more than 33% interest, exceeding a 30% threshold that stores and banks used to be able to avoid but rarely did.
“That’s how much they can charge,” said Chi Chi Wu, a senior attorney at the nonprofit National Consumer Law Center. “Credit cards can actually charge anything you want. This is a little known fact.”
The domino effect of a high federal funds rate and rising credit card interest rates could put many Americans in financial trouble this holiday season.
Although some consumers are holding back amid high prices, rising debt and shrinking savings, the average shopper expects to spend $1,652 on holiday shopping this year, more than has typically been spent over the past three years, according to consulting firm Deloitte.
A large proportion of purchases are made using credit cards. In an October survey of 1,036 shoppers by CardRates.com, nearly four in 10 respondents said they plan to carry holiday credit card debt in the new year.
The country's collective credit card debt stood at $1.08 trillion at the end of September, a record high. And the average interest rate was 21%, the highest ever documented by the Federal Reserve.
The key interest rate is the base interest rate that banks use to decide how much interest to charge their customers for credit cards and other loans. This rate is currently 8.50%, based on data published in the Wall Street Journal, which most lending institutions refer to.
The benefit of the Fed's series of rate hikes was that consumers were able to get good interest on their savings for the first time in years. Even if the Fed leaves interest rates unchanged, savers may come out ahead.
Unfortunately, most account holders do not take advantage of this potential opportunity.
About a fifth of Americans who have a savings account don't know how much interest they earn, according to a quarterly Paths to Prosperity study by Santander US, part of the World Bank Santander. Of those who knew their account's interest rate, most earned less than 3%.
But consumers have time to make a change that could allow them to get more out of their savings.
“We are still a long way from (the Fed) starting to cut rates,” said Greg McBride, chief financial analyst at financial services platform Bankrate. “This is great news for savers, who will continue to enjoy inflation-beating returns from the highest-yielding, government-insured online savings accounts and certificates of deposit. For borrowers, higher interest rates over a longer period of time underscore the urgency to repay and pay off costly credit card debts and home equity lines of credit.”
The Fed's series of interest rate hikes, which began in March 2022, have made borrowing more expensive for consumers as interest rates on credit cards and other loans have risen dramatically.
At the same time, inflation has made everyday necessities more expensive and pushed more Americans to rely on credit cards to make ends meet. However, lenders have become more reluctant to issue new cards, leaving more shoppers seeking higher credit limits in the midst of the holiday season, experts say.
In October, the application rate for higher limits rose to 17.8% from 11.2% in the same month last year and from 12.0% in 2019, New York Fed data showed.
For some consumers, a higher limit on a card they already own is almost their only option.
“After COVID, inflation and interest rates spiraled out of control … people have less emergency funds for car repairs or buying gifts,” said Brandon Robinson, president and founder of JBR Associates, which specializes in retirement planning strategies. “What they are. “That means they use their credit card more—over 30% or well over 50% of their credit card allotment—and then don’t get approved for another card because their credit is worse.”
The number of Americans working at least two jobs is at its highest level since before the COVID-19 pandemic, according to federal data, a rise that may reflect the financial pressure people are feeling amid high inflation.
According to the Labor Department, nearly 8.4 million people had multiple jobs in October, a number that represents 5.2% of the labor force, the highest percentage since January 2020.
“Paying for essential goods has become more challenging, and for some it is more difficult, if not impossible, to afford luxury goods and necessities, particularly for those at the lower end of the income and wealth spectrum,” said Mark Hamrick, senior economic analyst at Bankrate, USA TODAY said in an email.
People may also work part-time to save money in case of a layoff, as job cuts typically peak at the start of a new year.
The current interest rate is 5.25% to 5.5%. The Fed is expected to announce on Wednesday that interest rates remained unchanged for the third straight day.
Where is the economy heading?: Is a soft landing in sight? What the Fed funds rate and mortgage rates suggest
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When will the Fed meet?: What is the Federal Reserve meeting schedule for 2024? The Fed will meet again here.
As of 10:55 a.m. ET, the Dow Jones Industrial Average was up 0.07% and the S&P 500 was up 0.20% on Wednesday before the Fed made its rate decision in the afternoon.
Mortgage rates are falling, so is it time to buy?
It depends on.
First, the Fed does not directly set mortgage rates, but its actions have an impact. For example, when the central bank continually increased its key interest rate, the yield on the 10-year government bond also rose. Because these bonds are a measure of the interest rates applied to an average 30-year loan, mortgage rates rose.
But over the past six weeks, mortgage rates have fallen, averaging 7% for a 30-year fixed-rate mortgage. That's down from nearly 7.8% at the end of October, according to data released by Freddie Mac on Dec. 7.
That could give some would-be homeowners the confidence to start house hunting. According to the Mortgage Bankers Association, mortgage applications rose 2.8% in the week ending Dec. 1 compared to the previous week.
“Overall, however, mortgage rates remain quite high,” said Danielle Hale, senior economist at Realtor.com. “The typical mortgage interest rate according to Freddie Mac data is close to what we saw in August and early to mid-September, which was a 20-year high at the time.”
As a result, many potential buyers may still have to wait and see for further rate cuts, says Sam Khater, chief economist at Freddie Mac. Hale and many other experts expect mortgage rates to fall next year.
The Fed is expected to cut interest rates next year, although markets and economists are divided over how many rate cuts there will be.
Futures markets predict there will be four or five interest rate cuts in 2024, each amounting to a quarter of a percentage point. They predict the cuts will begin in the spring and ultimately reduce interest rates to just 4 to 4.25 percent.
But core prices, which exclude volatile food and energy costs and are more closely tracked by the Fed, rose 0.3% in November, more than the 0.2% rise the previous month. This could make the Fed more reluctant to cut interest rates in the near future.
Goldman Sachs and Barclays expect there will only be two rate cuts in 2024. And Fed Chairman Jerome Powell has warned in recent public comments that it is “premature” to talk about cutting interest rates.
Inflation fell slightly last month, with falling gas prices mitigating the impact of rising rents.
According to the Labor Department's Consumer Price Index, overall consumer prices rose 3.1% from a year ago, slightly below October's 3.2% increase. This slower pace brings the inflation rate closer to the level reached in June, which was the lowest level in over two years. From month to month, prices rose slightly by 0.1%.
However, core prices, which exclude the more volatile costs of food and energy and are more closely monitored by the Fed, rose 0.3% in November after rising 0.2% the previous month. This means that the annual increase in core inflation remains at 4%, although it is the lowest level since September 2021.