The Federal Reserve hiked its benchmark rate by 0.75 percentage points on Wednesday in an effort to temper the rising costs of consumer goods and services.
While economists say raising the interest rate will help cool consumer demand and hopefully ease record-high inflation, it will also raise the cost of borrowing for everything from houses to car loans. Lower-income households with credit card-debt — those with a median income of $16,290 per year and $35,630 per year — typically have a higher debt-to-income ratio than wealthier Americans, according to Federal Reserve data.
The Fed’s four rate hikes this year could hurt low-income families more than most, said Radha Seshagiri, the public policy and system change director at SaverLife, a nonprofit that helps families with low and moderate incomes to save money. They are already struggling to pay back credit-card loans and purchase big-ticket items like automobiles due to the rising costs, she said.
“‘People are starting to put their basic needs and their daily expenses onto their credit cards.’”
— Radha Seshagiri, the public policy and system change director at SaverLife
Seshagiri said most of the people that her group serves are hourly wage earners — who make their living on the number of hours worked in any given week — and require a car for their daily commute, either because they live in rural areas where public transportation is not available, or because they work night shifts. They have, she added, been hit hard by the rise in the cost of food and gas.
“People are starting to put their basic needs and their daily expenses onto their credit cards,” Seshagiri said.
Inflation hit a 41-year high in June, with prices on consumer goods and services increasing 9.1% from the year before. The price of groceries last month shot up by 12.2% on the year, and gas has risen by more than $1 over from July 2021 to $4.28 on Wednesday.
However, the recent rise in the cost of living has had an even bigger impact on rural America, according to a report by Iowa State University professor Dave Peters, which studied the impact of inflation in small towns. “The biggest inflationary impact on rural households has been the increased cost of transportation, which is essential in rural areas where residents have to drive longer distances to work, school, or to shop for daily needs.” Peters wrote.
Rural people are paying $2,470 per year more for gasoline and diesel fuels than they did two years ago, while urban people are paying $2,057 more, the report found.
Savings are running out
Americans were already dipping into their savings to cover rising costs. The personal savings rate — the percentage of disposable income that people save — dropped to 5.4% in May from 10.4% in May 2021, hitting one of the lowest levels in decades, according to the Bureau of Economic Analysis.
“At some point, those savings are gonna run out,” Seshagiri added.
Some 40% of Americans said they were already relying more on their credit cards because of inflation, according to a recent Forbes Advisor survey.
“Excessively high inflation tends to undermine consumers’ purchasing power, especially if their wages or other sources of income have not increased,” according to a report by Michael Fisher, an analyst at financial website TradingPedia. “Therefore, to meet rising costs of living, consumers may need to borrow.”
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