As prices rise, so too does our credit reliance

SPEAKER_1 (0:00)

Running a business is hard enough, so why make it harder with a dozen different apps that don't talk to each other? Introducing Odoo, the only business software you'll ever need. It's an all-in-one, fully integrated platform that makes your work easier, from CRM, accounting, inventory, e-commerce and more. And the best part, Odoo replaces multiple expensive platforms for a fraction of the cost. This is why over thousands of businesses have made the switch. So why not you?

Try Odoo for free at odoo.com. That's odoo.com.

SPEAKER_2 (0:30)

At Sentry, understanding starts with taking a seat, talking face-to-face, getting to know your business firsthand, diving into details, seeing risk from every angle, becoming experts in your business, and crafting coverage that really makes a difference. So save us a seat, we've got work to do. Property and casualty coverages are underwritten by a member of the Sentry Insurance Group, Stevens Point, Wisconsin. For a complete listing of companies, visit sentry.com. Policies, coverages, benefits and discounts are not available in the United States. See policy for complete coverage details.

Sabri Benishur (1:02)

AI is coming for insurance from American Public Media. This is Marketplace.

In New York, I'm Sabri Benishur. In for Kyra Rizdal. It is Monday, September 7th, and we are glad to have you with us. We say it all the time on this show, the engine of the US economy, the force that has kept it chugging along through tariffs and wars and more wars and natural disasters is the US consumer.

However, the engine that's keeping a lot of the US consumers chugging along is credit. Just how much are they leaning on credit? Well, we're going to find out tomorrow when the Federal Reserve reports numbers for July. We do know it has been on something of a roller coaster recently, down in May, up in June. Marketplace's Stephanie Hughes reports.

Stephanie Hughes (1:58)

Between May and June, our use of revolving credit grew 6%. That's comprised mostly of what we spend on credit cards, which meant?

Ryan Sweets (2:08)

Consumers are putting more of their credit card to pay for groceries, gasoline, necessities.

Stephanie Hughes (2:14)

Ryan Sweets, chief global economist at Oxford Economics. Those necessities are getting more expensive. Our wages are rising too, though not as fast. And consumers are using credit cards to make up the difference.

Now, so far, people generally are making payments on those debts on time.

Ryan Sweets (2:31)

Nothing screams that in aggregate, the consumer is under a lot of pressure, but we know that this consumer is very bifurcated.

Stephanie Hughes (2:38)

That K again. Higher income households doing well, lower income ones really feeling stretched. And Sweets points out earlier this year, when the war in the Middle East started, tax refunds helped a lot of people deal with the shock of higher gas prices. But Sweets says those refunds are behind us.

Moving forward, people will have to increasingly rely on credit.

Ryan Sweets (2:59)

So then what happens if something else goes wrong? And if we've learned anything over the last decade or so, when it comes to US economy, something else is going to go wrong.

Stephanie Hughes (3:08)

Still, the increased spending on credit cards is nowhere near the growth back in 2022 St. Olaf College economics professor Ethan Strube points out that back then, credit card usage went up around 15 percent.

Ethan Strube (3:20)

We all needed lots of little treats, right? And probably no surprise that Thessalonian inflation was really high.

Stephanie Hughes (3:26)

So people had to pay more to get those treats.

Strube says spending on credit cards has moderated since then. What happens next will in part hinge on what the Fed does next.

Ethan Strube (3:37)

If the Fed raises interest rates, if it raises this federal funds rate target, that does tend to spill over into the credit card rates. It's not perfect. It's not always one-for-one, but they move in the same direction over time, usually.

Stephanie Hughes (3:50)

And when credit card interest rates are higher, it's more expensive to carry a balance. So some people don't use their cards as much.

That's according to research from the Boston Fed.

Ethan Strube (3:59)

You know, maybe they'll instead at the bar from a friend or they'll do sort of a buy now, pay later type thing, or they'll just spend less money.

Stephanie Hughes (4:06)

And that matters because if they spend less money, that's less demand. And less demand slows down price growth. Of course, it also slows down the economy.

I'm Stephanie Hughes from Marketplace.

Sabri Benishur (4:18)

US stock markets were closed today because it's Labor Day. Oil markets, though, very open. We'll have the details when we do the numbers.