August Inflation Data Rattles Markets: What Lies Ahead?

The August Consumer Price Index or CPI increased 8.3% year over year, announced the U.S. Department of Labor. The figure was above the 8.1% expectation of the analysts and showed a 0.1% rise over the previous month. Core CPI, which excludes energy and food prices, was up 6.3% year over year and 0.6% sequentially and came above estimates. CPI, an indicator of inflation, had reached a 40-year high earlier this year.

The greater-than-expected increase came despite a 10.6% decline in gasoline prices. A 5% drop in energy prices was more than offset by higher shelter, food and medical care prices. The data sparked fear in investors that red-hot inflation might restrict consumer spending in the days ahead. This caused stocks from different industries to tank yesterday. Lower consumer spending will hurt companies that earn fee revenues every time people engage in transactions using their cards. Mastercard Incorporated MA and Visa Inc. V declined 3.8% and 3.4%, respectively, yesterday.

Mastercard and Visa, major financial transaction services providers, earn huge money by facilitating different types of money transactions and processing. Hence, curtailed consumer spending is bad news for companies like these. In the last few quarters, MA and V witnessed growth on higher cross-border volume, increased travel and related spending. However, growing inflation woes can potentially disturb that growth path. Increased retail sales in the holiday season might provide some relief.

The Mastercard SpendingPulse survey indicates a 7.1% year-over-year rise (excluding automotive) in holiday season retail sales. Also, it expects holiday shopping to start early this year, pulling growth metrics up as shoppers look for early deals to save money. Rising wages, job creation and increased savings during the pandemic might create a forcefield around consumer spending and protect it from dropping too much due to inflationary pressure.

The high inflation is expected to trigger more Fed rate hikes in the coming days. The coming policy meeting from Sep 20-Sep 21 might see a 75-basis point rate hike. The rising interest rates might discourage people from taking loans. However, Affirm Holdings, Inc.’s AFRM 2022 summer consumer spending trends had some interesting elements regarding inflation.

Rising inflation is somewhat boosting demand for Affirm Holdings as consumers are relying on its payment products to buy goods and services at higher prices. Furthermore, the relaxation of COVID-related restrictions triggered a socializing spree, boosting spending on flights. The total amount spent on flights in the 2022 summer jumped five times year over year, while the same for hotels jumped more than 100%. Hence, companies providing buy now, pay later (“BNPL”) and similar services might see an uptick in demand for their services due to inflation. With increasing dependence on BNPL, companies like Affirm Holdings are expected to benefit from higher transaction volumes in the coming quarters.

It is to be seen how credit service providers act as the market is going through inflation and staring at further rate hikes. Synchrony Financial SYF, a credit products provider, recently viewed a loan receivables acquisition opportunity as a lucrative one. Per Bloomberg, CFO Brian Wenzel of Synchrony Financial views the company as a “natural partner” for PayPal Holdings, Inc.’s PYPL $6.2 billion loan receivables offloading attempt. A similar deal of $6.8 billion took place between SYF and Paypal Holdings in 2018.

Synchrony Financial observed that consumers have been keeping up with their dues despite the current inflationary environment. This Zacks Rank #3 (Hold) company does not expect consumers to stress in the current economic environment.

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Mastercard Incorporated (MA) : Free Stock Analysis Report
 
Visa Inc. (V) : Free Stock Analysis Report
 
Synchrony Financial (SYF) : Free Stock Analysis Report
 
PayPal Holdings, Inc. (PYPL) : Free Stock Analysis Report
 
Affirm Holdings, Inc. (AFRM) : Free Stock Analysis Report
 
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