Gas Prices, Inflation, and Credit Risk: Preparing for Portfolio Deterioration
So far, the first quarter of 2022 looks strong from a credit card risk perspective. Seasonally adjusted credit cards rose slightly in February to $826 billion from $802 billion in January. Delinquency rate reports, which lag portfolio values, ended at 1.62% in 4Q2021, slightly lower than the all-time high recorded in 2Q2021.
But as gasoline prices rise and inflation outpaces wage growth, credit risk managers should temper their expectations for loan loss reporting in 2022 and anticipate erosion in 2023 if the inflation continues at current rates. As we approach the end of the first quarter, revisions to loss models are appropriate.
CNN cited research that suggests “the average American household will pay $2,000 more for gas in 2022” and that the seasonally adjusted spending rate for groceries will add at least $1,000 to grocery store prices. . Overall, consumer prices “jumped 7.5% in January, the most since 1982,” according to the article.
A recent US Congressional Joint Economic Committee reported:
Last year Americans faced the highest and fastest rates of inflation in four decades. Rapidly rising prices are hurting American families, eroding the value of their paychecks and increasing the financial strain of buying everyday consumer goods like groceries and gas. Inflation also erodes the value of savings, making it harder for Americans to build wealth.
Credit card managers need to consider two critical business metrics: 2022 results and impact through 2023, as this affects credit card originations and risk management.
The good news is that revolving debt will continue to rise as consumer budgets tighten. As a result, more debt will earn interest and more debt will accumulate due to household fiscal stress. However, the flip side is that the debt stock will become more risky. Add a few basis points to current interest rates, expect more delinquent credit card account wallets. The metric will not appear instantly, but anticipates a steady increase in risk.
There are arguably six weeks left in 2022 before the year locks down in the management of what is in store for consumer debt. On June 30, there will be 180 billable days, so all new defaults will be at risk 2023, not 2022. Collection performance, reflected in the 1.62% rate discussed above, will likely erode and return to normal levels. There will be a modest impact on the late amortization of 3Q2022, and it would not be surprising to see the charge rate rise from 1.57% to 2%.
As you consider new rates on Russian oil imports, be sure that rising credit card risk will increase. This is a global problem that warrants some tightening of credit policies, but not a call to tighten the brakes.
Preview by Brian RileyDirector, Credit Advisory Services at Groupe Conseil Mercator