Increase in Inflation adds to Personal Financial Pain

Americans saw a slight decline in their personal financial satisfaction in the fourth quarter of 2016, according to the AICPA’s Personal Financial Satisfaction Index (PFSi), released today. The slight reversal in momentum this quarter was primarily driven by an increase in inflation that was somewhat offset by greater optimism about the U.S. economy and their own organizations from CPA executives post-election, as well as gains in the stock market.

However, as the Trump administration takes office, the PFSiremains firmly in positive territory, indicating that Americans’ financial pleasure outweighs their financial pain.

The PFSi, calculated as the Personal Financial Pleasure Index minus the Personal Financial Pain Index, represents the financial standing of a typical American. Positive readings indicate that Americans are feeling more financial pleasure than pain. The Q4 index measured 18.5, a 0.2 point decrease from the prior quarter and a 2.8 point increase from one year ago. The decline from the prior quarter was due to the small increase in the Personal Financial Pleasure index (1.2 points) being outweighed by a 1.3 point increase in the Personal Financial Pain index.

Even though financial pleasure continues to edge up, the increase in the Personal Financial Pain Index outpaced it by a small margin in Q4, reaching its highest level in 18 months. The Pain Index is 1.3 points higher than the previous quarter and 1.1 points higher than the year before. The rise from the preceding quarter was driven largely by a 9.7 point increase in inflation. Inflation, the most volatile factor in the PFSi, continues to climb up from historic lows. It is the largest contributor to the movement Q4 index of any individual factor, either for pain or for pleasure. Though inflation drove the increase in pain in Q4, it remains below the Federal Reserve target of two percent.

“The Federal Reserve raised the target interest rate by a quarter percent in December and indicated that there may be additional hikes in 2017. All Americans can negate the higher costs that may come with rising interest rates by taking steps to improve their credit now,” said Kelley Long, CPA/PFS, member of AICPA’s Consumer Financial Education Advocates Group. “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.”

Personal taxes, the leading overall contributor to financial pain, showed a 0.6 point increase from the previous quarter, although they declined 1.6 points from the year-ago level. While personal taxes finished the quarter higher than the historical average, they are still far from the all-time high from late 1999 to mid-2001.

On a more positive note, loan delinquencies continued their downward trend and were 2.9 points lower than the third quarter and 12.9 points below a year ago. This demonstrates the continued strengthening of the housing market, as delinquencies on mortgages finished below the historical average for the first time since the third quarter of 2008.

“The PFS Market 750 and the CPA Outlook Index are the two components of the PFSithat 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,” added Long.

The Personal Financial Pleasure Index, at 63.0, is 1.2 points higher than the prior quarter and 3.9 points up from the prior year. The gain over the previous quarter was due to improvements in three of the four factors, led by a 4.6 point increase in the CPA Outlook Index, followed by a 2.6 point increase in the PFSi750 Market Index and an increase of 1.5 points in home equity. The only factor that did not improve from the previous quarter is the job openings index, which declined 4.1 points.

The AICPA Economic Outlook Index, which captures the expectations of CPA executives in the year ahead for their companies and the U.S. economy, was 4.6 points higher than both the prior year level and the previous quarter level. The survey was conducted in November, beginning the day after the election. Optimism for the U.S. economy was the biggest contributor to both the year over year and prior quarter improvement with positive sentiment for respondent’s own organization as the number two contributor.

The PFS 750 Market Index has been the biggest contributor to the Pleasure Index for several years, a trend that continued in Q4. Most market commentators agree that we there was a post-election rally fueled by expectations of reduced taxes and relaxed regulations. Share prices began an uptrend immediately after the election and trading volumes increased dramatically in December. Financials had the strongest gains in the 3 month period, followed by industrials and materials.