Americans’ financial well-being holds steady, despite rising inflation

Despite accelerating inflation and a decline in job opportunities from the previous quarter, Americans’ financial outlook in the final quarter of 2016 remained positive, according to the AICPA’s Personal Financial Satisfaction Index (PFSi).

The index stood at 18.5 in the fourth quarter of 2016, just 0.2 points lower than in the third quarter of 2016. It was up 2.8 points from the fourth quarter of 2015.

The component of the index that showed the greatest change last quarter was inflation, which increased by 9.7 points over the previous quarter. Inflation has continued to rise from historic lows but remains below the Federal Reserve’s target of 2%.

The Federal Reserve raised the target interest rate by a quarter of a percentage point in December and indicated there could be more hikes in 2017, which makes it more important for consumers to maintain high credit scores to hold down borrowing costs, Kelley Long, CPA/PFS, a member of the AICPA’s Consumer Financial Education Advocates Group, said in a press release.

“All Americans can negate the higher costs that may come with rising interest rates by taking steps to improve their credit now,” Long said. “Checking your credit reports and correcting any errors is the first step. From there, paying bills on time and keeping your credit card balance down can have a strong positive impact on your credit score, another key component in keeping borrowing costs down.”

The PFSi is calculated as the difference between two subindexes: the Personal Financial Pleasure Index and the Personal Financial Pain Index.

One of the four components of the Pleasure Index, the CPA Outlook Index (CPAOI), increased 4.6 points over the previous quarter. The CPAOI measures accounting executives’ expectations for the U.S. economy and their firms.

Since the fourth-quarter’s CPAOI surveys were conducted in November, beginning the day after the election, its rise likely reflects CPA executives’ belief that the Donald Trump administration would improve the economy.

The PFSi 750 Market Index, a proprietary AICPA index of the 750 largest companies by market capitalization, also increased 2.6 points, attributable to rising share prices and high trading volumes after the U.S. presidential election.

“The [PFSi 750 Market Index] and the CPA Outlook Index are the two components of the PFSi that react the quickest to events at the macro level, and both of those were up for the fourth quarter, when the election results were the big news story,” Long said. 

Home equity per capita increased 1.5 points as real estate market values outpaced outstanding mortgages. Improving home values were most notable in Oregon and Washington.

The fourth component of the Pleasure Index—job openings per capita—was down 4.1 points from the previous quarter.

Although the Personal Financial Pain Index rose only 1.3 points in the fourth quarter, the change was enough to send the index to its highest level in 18 months. Personal taxes, one factor contributing to the Pain Index, increased 0.6 points from the previous quarter, but that component was 1.6 points below the previous year’s level and continues to trend below its all-time high between 1999 and 2001.

Loan delinquencies dropped 2.9 points from the previous quarter and 12.9 points from a year earlier. Delinquencies were below the historical average for the first time since late 2008, suggesting a strengthening housing market, analysts said.

Underemployment also decreased 2.1 points from the previous quarter and came in 3.2 points below the previous year.

—Samiha Khanna is a freelance writer based in Durham, N.C. To comment on this article, email editorial director Ken Tysiac.