Howard Schneider, Lindsay (NYSE) Dunsmuir

(Reuters) – The coronavirus pandemic’s damage was limited by the financial strength of American households. However, this may be aggravating and prolonging the Federal Reserve’s inflation fight. As the central bank awaits people running out of money power, it is now awaiting the latter.

While the stock market plunge – an important source of household wealth which has expanded its reach across income levels in recent decades – might help to soften consumption in the end, this week’s reports on household debt and financial conditions gave little indication consumers are at breaking point.

The Labor Department published April inflation data Wednesday, which put the Fed’s dilemma in stark relief. Overall consumer price growth slowed significantly from March’s high-since 2005 pace, but it was not as fast as predicted. There were also new signs that inflation pressures held steady in key areas, such as travel and rent.

Seema Shah (chief strategist, Principal Global Investors) stated that this is yet another surprise in upward inflation and suggested that deceleration will be slow.

On Tuesday, data from the New York Fed showed that household debt increased to an all-time high in the second quarter. However, the evidence was not yet clear that households were overstretched.

Although there was a slight increase in delinquent households during the first stages, the New York Fed stated that the rate is “very low” by historical standards. The New York Fed also stated that the levels of greater debt stress, such as bankruptcies and debt collection proceedings are at their lowest level since 1999 when it started collecting data.

Fed policymakers are noted to be keenly monitoring household balances as they assess how long Americans will remain cash-rich.

Neel Kashkari, Minneapolis Fed president, said Monday that he expected to see more evidence of households’ balances being dwindled. There is a chance that the economy may have been forced to an even higher pressure equilibrium. “If that is true, we will have more work to do” to reduce inflation, he stated.

Although the U.S.’s overall output fell in the first quarter, this was largely attributable to the technical aspects of inventory management. However there are no signs elsewhere that indicate an increase in activity.

Bank of America (NYSE) has released the latest snapshot of financial well-being and spending by consumers. It was gleaned from their database of more than 67,000,000 small businesses and consumer customers. The data shows that credit card and debit card usage is increasing faster than inflation. On a year-overyear basis, credit and debit card spending rose 13% in April. However overall household card spending was 23.7% more than it was before the pandemic.

Visitors are traveling more frequently with Americans. On Tuesday, the number of visitors who were processed at Transportation Security Administration checkpoints was down 15% compared to 40% one year earlier. Tourism spots like Las Vegas see a rebound in visitors and spending.

Fed officials have been increasing interest rates to try and curb excessive demand. This will slow inflation but not force the economy into contraction, which is what it often does in response to tightening credit.

The Fed will be watching “how our policies flow through.” Raphael Bostic, Atlanta Fed President, said Tuesday night that he does not see any demand pulling back in key areas. So far “we don’t see that. “Demand is extremely strong.”

Bostic warned that demand will also slow down as people adjust to rising prices. He also said families could see their wealth shaken by “incredibly rapid and incredibly robust shifts” in the financial markets over recent weeks, as bond and stock indices dropped.

As the Fed might have difficulty influencing consumer spending, so too may the Fed’s strength in corporate and household balance sheets. The growing access of households to investment markets could boost the “wealth” effect of monetary policies. Lower asset values can lead to less consumption and better decision-making.

Roger Aliaga Diaz, Vanguard’s chief economist for Americas, stated that there is a growing belief that asset prices directly influence consumer behavior. He estimated that the billions of dollars in wealth that have been wiped away over the past weeks could account for one percent of the decline in U.S. growth.

“I’m certain they are counting that impact,” he stated.