The myth of hyperinflation series #6-Consumer debt & consumption

FRED:PCEPILFE   Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index)
In my last post, I talked about the liquidity trap (Banks not lending out enough despite being flooded with cash by Fed). For loans to households, banks tightened standards across all categories of residential real estate (RRE) loans and across all three consumer loan categories—credit card loans, auto loans, and other consumer loans—over the second quarter of 2020. Banks reported stronger demand for all categories of RRE loans and weaker demand for all categories of consumer loans.

Despite the massive increase in money supply, there was no visible increase in inflation lvl because the money probably went to equity and housing market.

M2 growth percentage was near 10% in 1998, 2001, 2008 and 2011, yet the CPI lvl at those years were 1.6%, 1.6%, 0.1% and 3.0% respectively. Hardly any sign of inflation to me, let alone hyperinflation.

US is a retail oriented and consumer-driven/trickle up economy with consumer spending accounts for nearly 70% of the GDP. Therefore, overheated consumer debt, consumption and demand usually precede the high inflation .

However, ever since the height of sub-prime mortgage crisis, household debt outstanding, household indebtedness ratio (ratio of household debt outstanding to disposable personal income ), household debt service ratio and net borrowing have all declined. The only related measure that has been going up is personal saving rate.

In most cases, consumer demand and consumption will not go up fast enough to cause the inflationary risk if personal saving rate goes up or household debt service ratio goes down faster than disposal personal income goes up.

Personal saving rate has been unprecedented in recent months and reached peak of 33.5% in April as household income has been lifted by stimulus check while spending opportunities have been restricted.

As a result, credit card balances fell by $76 billion in the second quarter, the steepest decline in the history of the data.

In total, non-housing balances (including credit card, auto loan, student loan, and other debts) saw the largest decline in the history with an $86 billion decline.

According to estimates released by the Bureau of Economic Analysis in June 2020, personal income decreased 1.1percent, real disposable personal income decreased 1.8 percent and real personal consumption expenditures increased 5.2 percent (probably the effect of stimulus check). If stimulus check doesn't keep coming in, it is hard not see consumer spending not being affected as the disposable income drops.

Let's take a look at the consumer sentiment-

According to the conference board, Consumer Confidence is down 6.9 pts

According to the preliminary result of University of Michigan's index of consumer sentiment in July, the score of 73.2 is way lower than that of 98.4 in July 2019.

Next, I will examine the producer/supply's relationship with hyperinflation.