Consumer Affordability---Prices & Expenses Are What Count

Consumer affordability is a widely discussed topic, but it's not enough to simply look at consumer prices. Affordability encompasses the prices or costs of essential and discretionary items, which are mainly captured in the consumer price index, along with mandatory expenses that standard price measures don't cover. When considered together, the costs of purchasing consumer items and meeting essential obligations indicate that "affordability" has become a big problem for a large group of families.

For example, consumers currently spend approximately $570 billion each year on non-mortgage interest payments, $660 billion on mortgage interest payments, and nearly $400 billion on property taxes.

The $1.6 trillion total absorbs 12% of aggregate wage and salary income, but it's not evenly distributed. About 45% of households carry credit card debt, and while two-thirds of households reside in owner-occupied homes, approximately 60% have outstanding mortgage debt.

The mandatory expense component of "affordability" encompasses "hard" actual payments, significantly affecting around 40% to 50% of families.

Every month, this group of consumers spends $130 billion on mandatory interest expense and property taxes before purchasing food and gas. This is not merely a "messaging problem," despite what one of Trump's advisors has reportedly stated in the media.

If the Federal Reserve chooses to reduce official rates this week, it would do little to improve the mandatory expense aspect of consumer "affordability" because people do not borrow at that rate. In fact, lowering the official rate could potentially worsen the situation if it results in higher long-term rates, which have a more direct impact on consumer borrowing costs.

Trump's economic team is foolish to deny or overlook the expense part of consumer "affordability", because rising debt use comes with an economic and financial cost. This situation could ultimately pose a challenge for the Fed and the bond market, given the continuously growing US government debt and rising interest expenses.