The middle class in America is beginning to regain its purchasing power after a year and a half of high inflation that lasted for decades.
But it still lags behind pre-pandemic levels.
new Primerica Family Budget IndexThe financial services firm found that the purchasing power of middle-income households — defined as those who earn between $30,000 and $130,000 annually — rose to 97.5% in July, up from 97% the previous month.
However, the improvement is still below the index’s baseline of 100% which occurred in January 2019. Any reading below this threshold shows that consumers’ purchasing power is in deficit.
The modest rise comes after credit card debt topped $1 trillion for the first time last month and a slew of recent data showed more consumers are having trouble paying their debts on time.
Read more: Personal Loans vs. Credit Cards: What to Use in an Emergency?
“We’re seeing some climbing out of the deepest hardships post-pandemic. We’ve seen inflation slow, and we’ve seen earned income start to pick up. Both are positive compared to where things were back,” Primerica CEO Glenn Williams told Yahoo Finance. “I think the important thing to realize is that although things don’t get worse as fast as they have, they don’t necessarily get better.”
Families have been under water for 44 months.
Inflation has dragged middle-income households below par for more than a year, according to Primerica data.
The survey showed that US purchasing power fell to a low of 85.6% in June 2022, down from a high of 102.8% in November 2020. Williams said the decline represented six years of lost gains in purchasing power over 18 months.
This sharp decline in June last year coincided with the rise in consumer prices 9.1%It is the largest increase in 12 months since November 1981. Although inflation has slowed since then, households have not yet fully recovered from the blow.
“The index has not yet returned to 100. When it reaches 100, it simply means that households have enough earned income in that month to make ends meet,” Williams said. “They haven’t made up for lost ground.”
According to Primerica data, in the 55-month period covered by the index going back to 2019, middle-income households experienced deficit spending for about 44 of those months.
“For 44 of those months, the families were underwater, which meant they didn’t have enough earned income to make ends meet,” Williams said. “This spending comes either through the withdrawal of savings or the use of credit.”
“The success we are beginning to see is very fragile.”
Although household finances have made some progress, these gains may not last long.
Credit card balances arrived $1.03 trillion, up 4.6% from a year earlier, the Federal Reserve Bank of New York revealed earlier this month. Similarly, the Federal Reserve Bank of St. Louis reported outstanding credit balances exceeded 1 trillion dollars. Both indicators hit record levels.
A separate study found that 51% of credit card borrowers were unable to pay their balance in full each month and allow debt to carry over from one month to the next, accruing interest. The J.D. Power researchers noted that this was the first time that the share of Americans who roll over their debt was higher than those who paid their bills on time.
Macy’s said last month that credit card sales in the second quarter fell 36%, with the retailer writing off many bloated balances of consumers unable to pay their bills.
“I think the success that we’re starting to see is very fragile. And I think the credit card balances that we’re seeing today at record levels are directly related to those months that those families have been underwater over the past 44 months,” Williams said. “And using credit cards to bridge the gap every month because their income was not keeping pace with inflation.”
Credit card interest rates have risen to record levels after the Federal Reserve’s efforts to curb inflation. The average credit card interest rate is now more than 20%, according to Bankrate, which is equal to its highest level in 38 years.
For people with revolving credit debt, the accrued interest can add up quickly. For example, if you have a credit card with an APR of 20.60% and want to pay off $3,000 in debt within 24 months, you would pay $153 per month. During that time, you will accrue interest of about $685. This is cash that you can use for other expenses.
Exacerbating the financial circumstances of many young Americans is the end of federal student patience in October. according to ExperianThe average student loan borrower will have to make a payment of $203 once payments resume.
“So you have challenges from the past, which I think are directly related to credit card balances, and then you have other potential challenges in the future. The challenge that many families are facing now is the beginning of loan payments and student loan payments,” Williams said.
“There is still an enormous amount of progress to be made so that these families are out of harm’s way.”
Gabriela is a Personal Finance Correspondent at Yahoo Finance. Follow her on Twitter @__gabrielacruz.
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