The Federal Open Market Committee has moved the target rate more in the past two months than at any point since 1981, and they are not done yet. The Fed’s aggressive stance on tackling inflation has resulted in increased borrowing rates that will likely move to 3.5% or higher by year-end. The higher rates are designed to cool the hot economy, and there are signs that is happening. That’s the good news.
The bad news? High inflation in the U.S. economy is impacting lower-income households the most, as those households are least likely to be able to absorb the higher cost of energy, food, and shelter. For example, households in the lowest income quintile spend about half of their monthly expenses on energy, food, and shelter. While overall inflation was at a 41-year high of 9.1% year over year in June according to the CPI, the inflation rate for energy, food, and shelter was 11.7%.
With stressed household finances, many industry watchers are looking for a rapid increase in loan defaults and an increase in vehicle repossessions that would be of crisis proportions. Fortunately, so far, that is not what we are seeing on the ground. In fact, the data clearly show both defaults and repos are currently well below historical averages.
Unfortunately, there is no government or third-party source that officially and accurately tallies repossession volumes. As the country’s largest auto auction, Manheim repossession volume trends serve as one proxy for the overall market. Working with Equifax data, Cox Automotive has also established a view of auto loan defaults to track the basis for repossessions. We define defaults as auto loans that are beyond 120 days past due but exclude loan accounts in bankruptcy proceedings.
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