While lower-income households were hit first by inflation, a subsequent rise in delinquencies among middle and high-income groups signaled a deeper economic issue. It showed that sustained cost pressures were depleting even larger savings buffers, indicating the strain was not temporary or confined to one segment.
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Unlike 2022, when stimulus savings allowed consumers to absorb price hikes, the financially depleted middle class now lacks the ability to pay more. This forces them to push back on price increases, creating significant consumer resistance that acts as a powerful, albeit painful, check on a new round of inflation from tariffs or other cost pressures.
Senator Warren highlights a critical omission in standard economic calculations: the cost of servicing debt. Expenses like credit card interest and student loan payments are often left out, meaning official data doesn't capture the full financial pressure American families are facing.
There are two distinct economies operating simultaneously. Those with a capital base (equities, real estate) can use financial engineering and leverage to thrive. Meanwhile, individuals relying solely on wages are being crushed by inflation, as their income fails to keep pace with rising costs.
Contrary to theories that recent blow-ups like Tricolor indicate more fraud is coming, the real issue is broad economic stress. Using Warren Buffett's "tide goes out" analogy, higher rates and persistent inflation are exposing fundamental weaknesses and squeezing consumers across large, non-AI sectors of the economy.
A surge in student loan delinquency rates to double-digit levels indicates significant financial distress, particularly for the middle third of the income distribution. These borrowers are forced to prioritize essential expenses like housing over their loan payments, revealing a deepening affordability crisis.
Navy Federal's data reveals that middle-class spending on the low-cost e-commerce site TEMU has "nosedived." This shift away from even the cheapest online options indicates that this demographic has exhausted its excess savings and is now under significant financial pressure, forcing them to consolidate spending at retailers like Walmart and Costco.
Analysis of delinquency rates revealed that high-income earners were initially seeing the fastest increases. The key differentiator for financial stability was not income but wealth, particularly homeownership, which provided a financial cushion against economic shocks.
An alternative data point from Equifax reveals significant economic stress. The delinquency rate for subprime auto loans (borrowers with scores below 660) has reached 10%, a level higher than that observed during the 2008-2009 global financial crisis, signaling trouble for lower-income households.
While the overall debt service ratio appears low, this average is skewed by high-income households with minimal debt. Lower and middle-income families are facing significant financial pressure and rising delinquencies, a critical detail missed when only looking at macroeconomic aggregates.
The longevity of above-target inflation is a primary concern for the Fed because it can fundamentally alter consumer and business behavior. Historical models based on low-inflation periods become less reliable. Businesses report being surprised that consumers are still accepting price increases, suggesting pricing power and inflation expectations may be stickier than anticipated.