Capital One study: Consumer financial health is under increased strain as inflation rises

The financial institution found that consumers are cutting spending, dipping into savings, and facing inadequate pay as inflation increases.
Written by Evan Zimmer, Staff Writer

Capital One revealed Sunday in its Marketplace Index survey that consumers are facing increased pressure on their financial health due to inflation and the COVID-19 pandemic.

The survey of 2,000 to 10,000 Americans has run every four to eight weeks since April 2020. The results are that the gap between high earners (more than $100,000 in household income (HHI)) and low earners (less than $25,000 in HHI) is widening and feelings of financial security in consumers are falling.

The study found 47% of low-income consumers reported not feeling financially healthy in February 2022, compared to 42% in April 2020, and 35% indicated they've received less pay compared to 33%.

In contrast, over the last three months, 30% of high earners and 20% of middle earners ($25,000 to $100,000 in HHI) earned a non-performance based raise or bonus, compared to just 10% of low-income consumers. Only 18% of consumers think income has kept up with the cost of living.

"Americans believe their financial health has declined to levels not seen since early in the pandemic," said Melissa Bearden, head of Consumer Intelligence at Capital One, in the press release. Rising inflation and looming bill payments are preventing consumers from making necessary purchases, she said.

A recent J.D. Power study found that 62% of all respondents said the price of goods is increasing faster than their income. The study also found that consumers look to their banks to support their financial health, and are finding that their needs aren't being adequately met.

To lessen the financial stress many consumers are experiencing in today's climate, banks can provide faster access to direct deposit and provide emergency funds to cover the gap for consumers who are living paycheck to paycheck.

Also: Over 50% of workers likely to switch jobs for more frequent pay: J.D. Power study

Capital One found that 27% of Americans reported not being able to pay at least one bill in February 2022, with nearly half of consumers indicating they are worried about making bill payments in the next month. 58% of consumers turned to loans or dipped into savings to cover expenses.

More frequent pay could assuage many consumers' stresses. Employees are growing increasingly unsatisfied with the standard pay cycle as payment technology advances, and are starting to seek more frequent pay. By providing on-demand or early pay to employees, people could experience an increase in financial health by having greater control over their finances. Employers could see higher retention rates and increased worker morale.

"I believe that [on-demand pay] will become more popular, and I think the speed at which it becomes more popular could escalate with the inflation challenges that we're facing," Jennifer White, a senior consultant in banking and payment intelligence with J.D. Power, told ZDNet.

The empowerment consumers feel to improve their financial health is the lowest it's been since February 2021, White said, and having more control over finances could help.

"If inflation continues to rise, employees need to understand how much they earn and have access to that funding more quickly, particularly in industries where the dollar amount they earn is not guaranteed from one paycheck to the next," White said.

Also: Ceridian redefines how employees get paid with its Dayforce Wallet

To combat inflation, the Federal Reserve is likely to increase interest rates in March for the first time since 2018. Inflation is currently at a 40-year high of 7.5%. Increasing short-term borrowing interest rates for banks will lead to higher interest rates for credit cards and other loans, and also a higher annual percentage yield (APY) for savings accounts.

By increasing interest on loans, the Federal Reserve aims to slow down the economy. A slower economy means less demand, fewer loans, and therefore, hopefully, less inflation.

Despite the financial challenges, Capital One found that 31% of middle-income earners and 45% of high-income earners reported feeling optimistic about their future financial health, more so than they were pre-pandemic. However, only 27% of low-income earners shared the positive outlook. Additionally, 43% of workers reported an increase in their income in February, compared to 27% indicating receiving less.

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