- Inflation moderated in July; used car prices saw smaller gains.
- Auto loan performance deteriorated, but severe delinquencies are low.
- Consumer credit surged as people tapped credit cards; consumer sentiment fell
New daily COVID-19 cases continued to increase last week. Jobless claims kept falling, but measures of consumer sentiment are showing declines so far in August as consumers deal with a host of issues including the fourth wave of COVID-19, diminishing unemployment benefits in half of the country and inflation.
Inflation moderated: Inflation moderated in July as many transitory factors like used car prices saw much smaller gains. The headline inflation aggregated measure increased 0.5% on a seasonally adjusted basis from 0.9% in June. The core CPI, which excludes Food and Energy, increased 0.3% from 0.9% in June.
Categories with the largest July increases in prices were lodging away from home (+6.0%), pets and pet supply (+3.1%), gasoline (+2.4%), personal care services (+2.2%), motor vehicle repair (2.0%), new cars and trucks (+1.7%), admissions to movies and sporting events (+1.4%), personal computers (+1.2%), and motor vehicle parts (+1.1%). Rent growth was unchanged from June and remains relatively contained.
On a year over year basis, the core CPI declined to 4.3% from 4.5% in June. The overall CPI was unchanged at 5.4%, which remains the highest year-over-year increase since 2008. The categories with the largest year-over-year increases were car rental (+74%), gasoline (+42%), used cars (+42%), lodging (+22%), and airline fares (+19%).
The base effects from lower prices last year are starting to diminish and some of the reopening surges, like in used cars, have started to decline. As expected, used vehicles did not contribute much to inflation in July as retail used vehicle prices peaked during the month following declines in wholesale used prices that started in June.
Consumer credit surged: The Federal Reserve reported that Consumer Credit excluding housing-related debt grew by $37.69 billion in June. Revolving credit (credit card balances) increased by $17.9 billion, which was nearly double the increase in May and the largest monthly increase since April 1998.
Non-revolving debt (auto loans and student loans) increased by $19.8 billion, which represented a slowdown from $27.6 billion in May. The May increase had been the largest single monthly increase in at least 30 years. Consumers have leveraged credit to fuel spending this spring after having deleveraged in 2020.
Car loan performance worsens: Auto loan performance deteriorated in July as waning stimulus and declining loan accommodations led to an increase in severe delinquencies. Still, auto loan defaults remain very low.
Equifax estimates that 1.5% of auto loans were in accommodation as of the end of June, which was down from 1.6% four weeks earlier. Relative to the level of accommodation pre-pandemic, approximately 592,000 auto loans did not have payments due in July and had frozen statuses, which prevented them from deteriorating.
In July, 1.16% of auto loans were severely delinquent, which was an increase from 1.13% in June. Subprime loan performance in July worsened as 4.36% of subprime loans were severely delinquent, an increase from 4.21% in June. Loans that were 60-days or more delinquent increased in July for the second month in a row but were down 5.3% year over year.
Loan access stable: Despite modest deterioration in loan performance in July as well as the second monthly decline in wholesale vehicle values, auto loan credit access was stable for the month. Our Dealertrack Auto Credit Availability Index showed credit was modestly tighter in July compared to February 2020 before the pandemic began, but auto credit was looser from a year ago for all types of vehicle loans.
Consumer sentiment falls: The initial August reading on Consumer Sentiment from the University of Michigan declined 13.5% to 70.2 from 81.2 in July. This left the index at the lowest level in a decade and down 30% from February 2020. Both underlying gauges of current conditions and future expectations declined with future expectations declining the most. Consumers saw buying conditions for vehicles decline again to the lowest level in at least 30 years.
The daily measure of consumer sentiment from Morning Consult has also declined thus far in August, but in the later days of last week delivered modest gains. The index as of last Friday was up 0.3% over the last seven days, leaving it down 1.2% so far in August.
Jobless claims drop: Jobless claims declined in the last week of reported data and came close to a new low for the pandemic while continuing claims are falling to new lows. Traditional continuing claims are down to 2.87 million; they averaged 1.73 million in the weeks of 2020 before the pandemic began.
As of July 24, 12.1 million Americans remain on some form of unemployment benefits, and that total declined by 920,000 from the prior week. With the American Rescue Plan, pandemic assistance and enhanced unemployment benefits were set to continue through September, although 26 states decided to end enhanced benefits this summer. Initial claims declined last week to 375,000.