Consumers have been on a rocky ride since the pandemic began more than three years ago.
Most recently, they’ve had to worry about a banking system that seems a bit wobbly after the failure of two major banks.
And that new worry over banks comes as consumers confront steadily higher interest rates on credit cards and auto and home equity loans, thanks to the Federal Reserve’s year-long steady increase in its fed fund rate.
Those higher interest rates are designed to reduce the scourge of consumers — inflation. Who hasn’t come home from food shopping wondering where all the money went? Still, there are some glimmers of hope that inflation, after hitting a 40-year high, is inching back down.
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And, remember, gasoline prices have tumbled by about one-third to about $3.24 a gallon and home heating oil prices have moderated. Even sky-high egg prices are coming down, dropping 6.7 percent in February compared with January.
Here’s some of what consumers are facing now:
Q. What has been the effect of the bank failures on consumers?
A. It was a scary time when Silicon Valley Bank, which has branch offices in Boston, Newton, and Wellesley, failed in March. Anxious depositors lined up outside the Wellesley branch to withdraw their deposits. But the Federal Deposit Insurance Corporation stepped in to guarantee all deposits, and the “crisis” seems to have subsided. There was no stampede of depositors trying to get their money.
Q. How safe should consumers feel about their bank and credit union deposits?
A. Very safe. For the vast majority of people, their money is rock-solid safe. It’s guaranteed by the “full faith and credit of the United States government” to at least $250,000 per depositor. And, in Massachusetts, there’s a second layer of protection available to most banks. The result is that your money is 100 percent guaranteed at those banks and credit unions. “No depositor has ever lost a penny,” according to the private corporations that guarantee deposits over the FDIC amount.
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Q. Have lenders changed their practices after the failure of two high-profile banks?
A. Actually, loan officers began at least slightly tightening their lending standards even before the bank failures, according to the most recent survey of senior loan officers by the Federal Reserve. That means, for auto and home equity loans, lenders are requiring higher minimum credit scores and are imposing some limits on the amount of loans. I’m guessing the recent bank failure will continue the trend.
Q. What has happened to consumer buying power?
A. You are almost certainly feeling the sting of inflation, which has averaged 6.5 percent since the middle of 2021 (compared with 1.5 percent in the five years before the pandemic). Let’s imagine a basket of goods and services representing a standard array of consumer items, including housing, education, recreation, food and beverage, apparel, transportation, and health care.
And let’s say that the cost of that basket of goods and services was $500 at the beginning of the pandemic in 2020. Today, those same goods and services cost $582. Either you are digging deeper to pay for the same things, buying on credit, or going without.
Q. Does that mean more people are relying on credit cards?
A. Credit card debt bottomed out in April 2021 but has skyrocketed since then and now exceeds prepandemic debt by about 10 percent. That means consumers are not letting up on spending, even in the face of inflation at a level not experienced since the 1980s. At the beginning of the pandemic, the personal savings rate rose to an extraordinary 25 percent of disposable income, as the government stepped in to prop up the economy with stimulus checks and other benefits and consumers cut spending on clothing, restaurants, travel, or other things. Suddenly flush with cash, many consumers wisely paid down credit card balances. As a result, credit card debt plunged by more than $100 million, almost 15 percent, according to the Federal Reserve. But the pay-down in credit card debt didn’t last.
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Q. What does more credit debt mean to consumers?
A. Make no mistake, carrying credit card debt is a drag on your household finances. The average interest rate now hovers around 19 percent. At that rate, the monthly interest on an unpaid balance of $1,000 is about $16. But the average consumer balance in Massachusetts is about $8,000 (the ninth highest in the country), and on that amount of debt the interest is about $125 a month. That’s more than $1,500 a year. And what exactly are you paying for? Bank profits.
Q. Are credit card interest rates rising?
A. Yes, significantly, from about 15 percent to more than 19 percent in 2022, with some cards carrying even higher rates. As the Federal Reserve has increased its interest rate so, too, have banks on their credit card customers.
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Q. Less savings and more debt don’t sound good for consumers.
A. No, if there’s a further economic downturn, consumers may find themselves really struggling. Most experts believe you should have enough money in your emergency fund — cash you can readily tap — to cover at least 3 to 6 months of living expenses.
Q. What strategies may help?
A. The one obvious silver lining to the Fed’s increasing its federal fund interest rate is higher earnings on savings. When interest rates were low, many banks paid a small fraction of 1 percent — or no interest at all — on checking accounts and precious little more on savings accounts and CDs. But that’s all changed. Many banks are now advertising CDs that pay more than 4 percent, and they may well rise higher in coming months.
People who are looking for safe places to invest can earn a very respectable return by putting cash into a CD — not enough to keep pace with inflation, but an appealing alternative as mutual fund retirement accounts erode.
Q. How safe are CDs?
A. CDs are a favorite of retirees because they are safe. CDs opened at FDIC-insured banks or credit unions backed by the National Credit Union Administration are guaranteed by the federal government. You won’t lose your money if your bank or credit union fails, as long as you’re within deposit limits. And unlike the stock market, your investment can never lose its face value.
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The FDIC’s standard insurance amount is $250,000 per depositor, per insured bank, for each of several account ownership categories.
Q. What’s going on with energy prices?
A. Last summer, it cost me more than $60 to fill the tank of my Honda SUV. Now it’s less than $40. What a relief. One habit I acquired when gasoline was heading toward $5 a gallon was shopping around. Search online for “cheapest gas near me” to find options that may work for you.
You can save money by joining a loyalty and rewards program offered at supermarkets, warehouse stores, and other retail outlets. I now go out of my way to the gas station where I am a member. A gallon of gasoline was $3 last time I filled up there, about 25 cents cheaper than the statewide average.
Q. What about home heating oil and natural gas?
A. In November, the price of a gallon of No. 2 home heating oil in Massachusetts was a scary $5.93, the highest amount in more than 30 years of recordkeeping by the US Energy Information Administration. But as of late March, the price was down to $4.15 a gallon, about a 25 percent drop. Still, home heating this winter was higher than last winter, but only by about 5 percent.
Q. Natural gas?
A. It wasn’t as bad as I had feared it would be. Yes, the cost of natural gas was higher, but I used less. In the first three months of this year I paid only 1.2 percent more than last year. But I used 7 percent fewer terms. That’s because I made a determined effort to keep the thermostat at 66 degrees or below.
Q. Any bright spots?
A. Yes, US consumer confidence unexpectedly improved in March as Americans grew more optimistic about the outlook for business conditions and the labor market.
The Conference Board’s index increased to 104.2 from 103.4 in February, according to the latest data.
Got a problem? Send your consumer issue to sean.murphy@globe.com. Follow him @spmurphyboston.